Nature’s Sunshine Products, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results; dollar amounts below are in millions unless otherwise noted. The company manufactures and sells nutritional and personal care products primarily through independent distributors, across NSP Americas, NSP Russia/Central and Eastern Europe, NSP China, and Synergy WorldWide.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $88.8 | $89.3 | $267.4 | $253.7 |
| Gross profit / margin | $65.7 / 73.9% | $65.8 / 73.7% | $197.3 / 73.8% | $187.3 / 73.8% |
| Operating income / margin | $3.5 / 4.0% | $2.2 / 2.4% | $6.6 / 2.5% | $4.2 / 1.7% |
| Net income | $1.3 | $2.3 | $1.6 | $3.8 |
| Net income attributable to common shareholders | $1.5 | $2.4 | $2.1 | $4.4 |
| Diluted EPS | $0.08 | $0.13 | $0.11 | $0.23 |
- Cash flow: Operating activities provided $14.2 for the first nine months, versus $8.0 in 2017. Investing activities provided $1.1, including proceeds from property sales, compared with $1.6 used in 2017. Financing activities used $10.3, primarily reflecting net repayments under the revolving facility.
- Liquidity: Cash was $47.9 at September 30, versus $42.9 at year-end 2017; working capital was $44.0, down from $48.9. Of cash, $40.6 was held by foreign subsidiaries and may face withholding taxes or other repatriation restrictions.
- Debt: Revolving-credit borrowings were $1.8, against a $25.0 facility maturing in July 2020. The balance sheet also reports $1.5 of current related-party notes payable. The company reported compliance with amended debt covenants.
Changes versus comparable periods
- Q3 sales declined 0.5% year over year, or 0.4% excluding currency effects. Nine-month sales rose 5.4% reported and 3.4% excluding currency effects.
- Q3 operating income increased 63%, while net income attributable to common shareholders declined 39%. For the nine-month period, operating income rose 56%, but common-shareholder net income fell 53%.
- Q3 segment performance varied: NSP China sales grew 19.3% and NSP Russia, Central and Eastern Europe grew 15.1%; NSP Americas declined 6.8%, while Synergy sales were essentially flat. For the nine months, all segments except NSP Americas grew, led by Synergy (+11.8%) and NSP China (+37.8%).
- In the U.S., management attributed weaker sales to distributor recruiting and retention and said the decline may continue into 2019. Latin America was affected by product-registration challenges and the prior exit from Costa Rica and Nicaragua. South Korea grew strongly; Japan and Europe weakened.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said operating cash, together with available cash, should fund normal operating needs and capital expenditures, but identified prolonged economic weakness, lower product demand, and unfavorable tax or non-income-tax outcomes as potential liquidity risks.
- Q3 and nine-month operating results included property-sale gains: $1.7 from a Utah land sale in Q3 and a further $2.3 from a Mexico City building sale earlier in 2018. The reported SG&A improvement therefore includes material nonrecurring gains. CEO transition expenses were $1.5 for the nine months; $1.1 remained accrued at quarter-end.
- Foreign-exchange losses contributed to other expense: $0.4 in Q3 and $1.4 year to date, versus gains in the comparable 2017 periods. The effective tax rate was 57.6% in Q3 and 68.8% for nine months, largely reflecting foreign losses, particularly in China, that currently provide no tax benefit, and other foreign tax items.
- Adoption of revenue-recognition standard Topic 606 reduced opening accumulated deficit by $0.9 net of tax; management reported a $0.5 reduction in nine-month revenue and $0.2 reduction in operating income from its application.
- Key risks include dependence on distributor recruitment and productivity, foreign-currency exposure, direct-selling and product regulation, international trade and tariff uncertainty, litigation and tax contingencies, product liability, and distributor compliance. The company does not hedge foreign-exchange exposure with derivatives. Management reported effective disclosure controls and no material change in internal control during the quarter.
- Potential contingencies include up to approximately $3.2 of non-income-tax matters and up to approximately $1.9 related to other litigation; these are management’s stated possible payment ranges, not estimates of probable loss.
Important facts for investors to verify
- Whether the Q3 operating-income improvement is sustainable after excluding the $1.7 property-sale gain and considering other timing-related expense items.
- Whether distributor recruiting and retention stabilize, particularly in the U.S. and NSP Americas, and whether growth in China, Russia and South Korea continues.
- How much of the $47.9 cash balance can be readily repatriated, and whether operating cash flow remains strong when accrued-liability timing effects normalize.
- Whether foreign-exchange losses and unusually high effective tax rates persist, and how open tax positions and non-income-tax contingencies resolve.
- Whether the company remains within its amended credit covenants and how the expected 2019 lease-accounting adoption affects reported assets and liabilities.