Nature’s Sunshine Products, Inc. — Q3 2012 Form 10-Q
Business and period: The company manufactures and directly sells nutritional and personal-care products through independent distributors. This unaudited filing covers the quarter and nine months ended September 30, 2012, compared with the same 2011 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $91.2m | $91.1m | $277.1m | $275.8m |
| Operating income (loss) | $8.7m | ($5.1m) | $28.2m | $10.6m |
| Net income (loss) | $6.4m | ($2.3m) | $20.9m | $10.0m |
| Diluted EPS | $0.40 | ($0.14) | $1.31 | $0.64 |
| Operating margin | 9.6% | (5.6%) | 10.2% | 3.8% |
- Q3 sales were nearly flat year over year; in local currencies they rose 2.1%. Nine-month sales increased 0.5% reported and 2.0% in local currencies. Foreign exchange reduced sales by $1.8m in Q3 and $4.3m year to date.
- Q3 2011 included $14.75m in NutriPlus contract termination expense. Excluding that charge, prior-year Q3 operating income was approximately $9.6m versus $8.7m in Q3 2012; nine-month operating income was $28.2m versus approximately $25.3m on the comparable adjusted 2011 basis.
- Cost of goods sold was 19.4% of sales in Q3 and 19.2% year to date, versus 18.5% and 19.1% in 2011. Volume incentives were 36.3% and 36.2% of sales, respectively. SG&A was 34.7% and 34.4%, compared with 35.0% and 35.3%.
- Synergy WorldWide sales grew 7.1% in Q3 and 11.5% year to date; NSP International sales declined 5.4% and 5.3%; NSP United States sales rose 0.5% in Q3 but fell 1.0% year to date. Growth at Synergy, particularly in Europe and Korea, offset weakness in several NSP International markets.
Cash, debt and liquidity
- Cash and cash equivalents were $72.5m at September 30, 2012, up from $59.0m at year-end 2011. Working capital was $73.5m, versus $57.3m.
- Operating cash flow was $17.3m for the first nine months, compared with cash used of $4.1m in 2011. Investing activities used $2.1m, including $5.6m of capital expenditures; financing activities used $2.0m, including $2.5m of debt principal payments and $1.6m of dividends.
- Of cash, $52.4m was held in foreign markets and may be subject to repatriation restrictions or withholding taxes. The company had $2.2m of unrestricted short-term investments.
- Term debt totaled $6.7m ($3.3m current and $3.4m long-term). A $15m revolving facility was undrawn; it expires in August 2013. The company reported compliance with its debt covenants.
- The company declared and paid two quarterly dividends of $0.05 per share during 2012; dividends declared year to date totaled $0.10 per share.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management said available cash, operating cash generation and the undrawn credit facility should meet working-capital needs for the foreseeable future, while noting that prolonged economic weakness, reduced product demand, or adverse tax or contingency outcomes could impair liquidity.
- Management cited raw-material and production cost pressure, foreign-exchange exposure, distributor retention, and market-specific weaknesses. Peru sales were sharply lower after regulatory changes restricted sales of key products through direct selling; Mexico faced lower distributor activity and management restructuring; Japan remained affected by post-disaster weakness. Russia’s currency depreciation was also cited as a risk to distributor purchasing power.
- Belarus and Venezuela were treated as highly inflationary economies. The company reported that currency movements adversely affected reported sales and that it does not use derivatives to hedge foreign-exchange exposure.
- Legal proceedings include VAT assessments and other civil matters. Management estimated potential future payments of $0 to approximately $1.0m and recorded no provision for these proceedings. Accrued foreign non-income-tax contingencies were $6.6m; liabilities for unrecognized tax positions were $9.8m. The IRS was auditing 2009 and 2010 returns; prior disputes for 2003–2005 and 2006–2008 had been settled, with the latter years closed.
- Newly identified risks include unintended adverse effects from distributor compensation or promotional changes and dependence on the Spanish Fork facility, where the company manufactures approximately 85% of products sold. Product regulation, product liability, distributor recruitment and retention, currency controls, and repatriation restrictions are also material risks.
- Disclosure controls were assessed as effective as of September 30, 2012; the company reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess underlying profitability by separating the 2011 NutriPlus charge from reported year-over-year comparisons.
- Track whether Synergy’s growth can offset ongoing weakness in NSP International, especially in Peru, Mexico and Japan, and whether distributor counts and retention stabilize.
- Verify the availability and repatriation of the $52.4m held in foreign markets, along with compliance with credit-facility covenants and debt repayment terms.
- Monitor tax audits, the $6.6m non-income-tax accrual, legal matters and the potential impact of unfavorable outcomes.
- Evaluate currency, raw-material cost, regulatory and manufacturing-disruption exposure, including the company’s dependence on its Spanish Fork facility.