Nature’s Sunshine Products, Inc. — Q1 2019 Form 10-Q
Business and period: The company manufactures and sells nutritional and personal-care products primarily through independent distributors. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are with December 31, 2018. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $91.3 million | $87.3 million |
| Gross profit / margin | $67.8 million / 74.3% | $64.6 million / 74.0% |
| Volume incentives | $31.0 million / 34.0% of sales | $31.4 million / 35.9% |
| SG&A | $33.9 million / 37.1% of sales | $32.4 million / 37.1% |
| Operating income / margin | $3.0 million / 3.3% | $0.9 million / 1.0% |
| Income before taxes | $2.9 million | $1.6 million |
| Net income | $1.7 million | $0.3 million |
| Net income attributable to common shareholders; diluted EPS | $1.8 million; $0.09 | $0.5 million; $0.03 |
| Operating cash flow | $(4.6) million | $3.7 million |
| Capital expenditures | $0.4 million | $0.5 million |
Financial position and liquidity
- At March 31, cash and cash equivalents were $45.4 million, current assets $103.3 million, and current liabilities $62.3 million; reported working capital was $41.0 million.
- Cash declined $5.2 million during the quarter. The company attributed the operating cash outflow primarily to timing of receipts and payments, including accrued liabilities and income taxes payable.
- No borrowings were outstanding under the $25 million revolving credit facility, which matures July 11, 2020. The company reported compliance with its covenants. A $1.5 million related-party note payable was current.
- Adoption of lease accounting added operating lease right-of-use assets and liabilities. At March 31, right-of-use assets were $21.8 million and total lease liabilities were $22.9 million; these are not borrowings under the credit facility.
- Of cash on hand, $37.4 million was held in foreign markets and could be subject to withholding taxes or other repatriation restrictions. Management said cash, operating cash generation, and available cash should fund normal operating needs, while noting potential adverse effects from economic weakness, reduced product demand, or unfavorable tax outcomes.
Changes and management commentary
- Sales increased 4.5% reported and 7.1% excluding currency effects; foreign exchange reduced sales by approximately $2.3 million.
- Segment sales: NSP Americas fell 7.7% to $38.7 million; NSP Russia, Central and Eastern Europe rose 18.9% to $11.4 million; Synergy WorldWide rose 10.0% to $35.0 million; and NSP China rose 52.4% to $6.3 million. Management cited growth in China, Russia/CEE, and Synergy Asia, offset by declines in the Americas and Synergy Europe.
- Gross margin improved to 74.3%, which management attributed to favorable market mix. Volume incentives declined as a share of sales to 34.0%.
- SG&A rose $1.5 million, primarily due to $1.6 million of U.S. restructuring costs, including severance. Accrued severance and rent costs were $1.6 million at quarter-end, versus $0.3 million at year-end.
- Operating income increased to $3.0 million. Other expense was $48,000, compared with $740,000 of other income in Q1 2018; 2019 other expense primarily reflected foreign-exchange losses. The effective tax rate was 41.0%, versus 79.5%, and remained above the 21% U.S. federal statutory rate, principally due to foreign losses without current tax benefit and other unfavorable foreign items.
- Active independent distributors and customers increased to approximately 232,800 from 224,100 year over year; active Managers rose to approximately 14,000 from 13,700. Management also cited weaker U.S. recruiting and retention and declines in NSP Americas distributor counts.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Key disclosed risks include distributor recruitment and retention, direct-selling and product regulation, foreign exchange, international trade and geopolitical conditions, cybersecurity and privacy, product liability, and the China joint venture’s implementation.
- The company reported various legal proceedings and tax matters. It accrued $0.3 million for non-income-tax contingencies, with possible future payments estimated at $0 to $3.4 million; accrued $1.9 million for other litigation, with possible future payments estimated at $0 to $0.4 million. It stated that some additional matters have reasonably possible losses that are not currently estimable and are not accrued.
- U.S. federal tax years 2015–2017 and foreign tax years 2012–2018 remained open to examination. Accrued unrecognized tax positions were approximately $2.1 million.
- The company adopted lease accounting effective January 1, 2019, recording approximately $23.1 million of right-of-use assets and $24.0 million of lease liabilities at adoption; management said adoption did not materially affect earnings or cash flows.
Important facts for investors to verify
- Whether sales growth in China, Russia/CEE, and Synergy Asia continues, and whether declines in the Americas and Synergy Europe abate.
- Whether distributor recruiting and retention improve, particularly in the U.S., and how distributor activity translates into sales.
- Whether operating cash flow recovers after the Q1 outflow and whether foreign-held cash is readily available for corporate needs.
- Progress and costs associated with the restructuring, and the sustainability of improved operating margins.
- Developments in tax examinations, non-income-tax exposures, litigation, foreign-exchange effects, and the China joint venture.