Natural Health Trends Corp. — Q3 2017 Form 10-Q
Business context and reporting period
Quarter and nine months ended September 30, 2017. Natural Health Trends is an international direct-selling and e-commerce company selling NHT Global personal care, wellness and lifestyle products. It reported one operating and reporting segment. Hong Kong sales largely represent products shipped to members in China.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $40.1 million | $70.7 million | $151.5 million | $225.4 million |
| Gross profit / margin | $31.9 million / 79.6% | $57.1 million / 80.7% | $122.3 million / 80.7% | $182.5 million / 80.9% |
| Operating income / margin | $8.5 million / 21.2% | $15.2 million / 21.5% | $34.4 million / 22.7% | $44.1 million / 19.6% |
| Net income | $7.3 million | $12.6 million | $28.1 million | $36.0 million |
| Diluted EPS | $0.65 | $1.12 | $2.49 | $3.14 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $15.3 million | $36.3 million |
At September 30, cash and cash equivalents were $127.0 million, including $73.4 million of available-for-sale investments classified as cash equivalents; restricted cash was $3.1 million. Current assets were $140.5 million and current liabilities $42.5 million, yielding $98.0 million of working capital and a 3.30 current ratio. Total liabilities were $49.5 million; the filing does not disclose a debt balance. Cash and cash equivalents increased $1.0 million from year-end 2016. Dividends paid during the first nine months totaled $14.2 million, or $1.25 per share.
Material changes versus prior comparable periods
- Q3 sales fell 43%; nine-month sales fell 33%. Hong Kong revenue declined 47% in Q3 and 35% year to date, driven by the Asian-market slowdown and fewer members.
- Hong Kong accounted for 87% of Q3 sales and 89% of nine-month sales. Approximately 97% of company sales came from subsidiaries outside the Americas.
- Active members were 99,690 at quarter-end, down from 107,290 three months earlier and 122,900 a year earlier.
- Q3 net income declined 42% year over year; nine-month net income declined 22%. Nine-month operating margin increased to 22.7% from 19.6%, reflecting lower operating expenses relative to sales, while gross margin edged down.
- Operating cash flow declined to $15.3 million from $36.3 million, primarily due to lower product orders and member eWallet usage, partly offset by inventory reductions. SG&A fell 33% in Q3 and 32% year to date, mainly from lower employee, event and credit-card costs.
Outlook, risks, contingencies and unusual items
Management said existing liquidity and operating cash flows should fund normal operations and financial commitments for the foreseeable future. It prioritized investment in Greater China and Southeast Asia, while also investing in Mexico and Peru, and continued preparations related to a potential China direct-selling license. The filing gives no numerical revenue or earnings guidance and says it cannot predict whether or when the license will be obtained or whether resulting operations would be profitable.
China-related regulatory and operating exposure is significant: the company does not hold a China direct-selling license, and substantially all Hong Kong revenue is derived from product sales delivered to members in China. Foreign exchange, direct-selling regulation, member retention, product regulation and litigation are among the stated risks. Cash held in bank accounts overseas was $121.2 million, including $6.9 million in China subject to foreign currency controls. The company reported no material changes to its previously disclosed risk factors.
A proposed $1.75 million securities class-action settlement was submitted for preliminary court approval on October 3, 2017; no hearing date had been set. If approved, insurers are expected to fund it fully. Related shareholder derivative cases were stayed pending the class action. On October 30, the board declared a $0.12 quarterly and $0.15 special dividend per share, payable November 24, 2017; future dividends remain discretionary. The Q3 tax provision benefited from a true-up of foreign tax credits.
Important facts for investors to verify
- Whether the proposed securities settlement receives court approval and is fully covered by insurance, and the status of the stayed derivative cases.
- Trends in Hong Kong/China sales, active members and the company’s ability to sustain revenue as the business remains highly concentrated.
- Progress and potential costs or tax consequences associated with China licensing, regulatory compliance and repatriation of foreign earnings.
- Operating cash generation, eWallet-related cash-flow effects, overseas cash availability and the sustainability of dividend payments.
- Whether gross-margin pressure, foreign exchange movements and lower sales affect profitability in subsequent quarters.