Nature’s Sunshine Products, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with the three months ended March 31, 2015, unless otherwise noted. The company manufactures and directly sells nutritional and personal-care products through independent distributors, across four segments.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $82.4 million | $83.9 million | Down 1.8%; up 1.3% excluding currency effects |
| Gross profit / gross margin | $60.4 million / 73.3% | $62.0 million / 73.9% | Margin down 0.6 percentage points |
| Operating income / margin | $2.1 million / 2.6% | $5.3 million / 6.4% | Down 60.2% |
| Income from continuing operations | $1.8 million | $4.2 million | Down 57.4% |
| Net income attributable to common shareholders / diluted EPS | $2.1 million / $0.11 | $5.7 million / $0.30 | Lower; 2015 included discontinued-operation income |
| Operating cash flow | $2.9 million provided | $0.9 million used | Improved |
| Cash and cash equivalents at period end | $46.4 million | $50.1 million | Down $3.6 million year over year |
| Revolving credit borrowings at March 31 | $7.5 million | $2.7 million at Dec. 31, 2015 | Up $4.8 million during Q1 |
SG&A rose 7.8% to $28.4 million, or 34.4% of sales versus 31.4%. Cost of sales increased to 26.7% of revenue from 26.1%; volume incentives were 36.3% versus 36.2%. Other income was $1.6 million, compared with a $0.3 million loss, primarily due to higher foreign-exchange gains. The effective tax rate rose to 51.4% from 16.1%.
At March 31, 2016, working capital was $47.8 million, total assets were $210.5 million, and total liabilities were $73.6 million. Of the $46.4 million in cash, $42.8 million was held in foreign markets and may be subject to withholding taxes or repatriation restrictions. The company had a $25 million revolving facility maturing September 1, 2017, and reported compliance with its covenants. It declared and paid a $0.10-per-share dividend; no shares were repurchased in the quarter.
Material changes versus prior comparable period
- Revenue fell $1.5 million as a $2.5 million adverse currency impact and weaker Russia, Central and Eastern Europe sales outweighed growth in Synergy WorldWide. In local currencies, consolidated sales increased 1.3%.
- Segment sales were $45.2 million for NSP Americas (down 2.9%), $6.4 million for NSP Russia, Central and Eastern Europe (down 14.7%), $29.8 million for Synergy WorldWide (up 3.8%), and $1.0 million for China and New Markets (down 11.9%).
- Operating income declined $3.2 million. Management attributed higher SG&A principally to $1.0 million in non-capitalizable ERP training costs and $0.6 million in additional China investment. The higher cost-of-sales percentage was attributed primarily to currency effects.
- Q1 2015 included $1.3 million of income from discontinued operations, reflecting proceeds from the sale of Venezuelan fixed assets; there was no such income in Q1 2016.
- Operating cash flow improved, while investing cash outflow fell to $1.3 million from $4.7 million, reflecting lower capital spending. Financing provided $2.9 million versus $2.7 million used in Q1 2015.
Outlook, commentary, risks and contingencies
- Management expects Russia, Ukraine and neighboring markets to remain pressured by political unrest, sanctions and currency devaluation, and does not expect the decline to reverse in the near term. It cites distributor relationships as a potential foundation for renewed growth when conditions stabilize.
- The company expects a China multi-channel strategy, including direct selling and e-commerce, but timing depends on product registrations and regulatory permits. Q1 China and New Markets sales were wholesale sales outside China.
- Management believes cash, operating cash generation and borrowing capacity should fund normal needs, dividends, repurchases, capital expenditures and potential business development for the foreseeable future. It cautions that prolonged economic weakness, lower product demand, or unfavorable tax-contingency outcomes could harm liquidity. ERP implementation was expected to be completed by early 2017.
- Foreign exchange is a material risk: the stronger U.S. dollar reduced Q1 sales by about $2.5 million. The company does not use derivatives to hedge currency exposure. Other cited risks include distributor retention and recruitment, product and direct-selling regulation, product liability, international operations, China execution, and cybersecurity.
- The company had $7.8 million accrued for unrecognized tax positions. It had $0.3 million accrued for non-income-tax contingencies, with potential future payments estimated at $0 to $3.6 million; other foreign tax and civil matters had no provision and estimated potential payments of $0 to $0.1 million. Management states litigation outcomes are uncertain. Part II reports no legal proceedings, while the financial-statement notes describe ongoing matters.
- No material changes to risk factors were reported from the 2015 Form 10-K. Management concluded disclosure controls were effective as of March 31, 2016, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and distributor activity stabilize in Russia, Ukraine and other challenged markets, and whether reported growth continues when measured in local currencies.
- Whether SG&A spending, including ERP and China investment, moderates and operating margins recover.
- The drivers and sustainability of foreign-exchange gains, the elevated quarterly tax rate, and the $7.8 million uncertain-tax-position accrual.
- Cash availability and repatriation restrictions, revolving-credit usage and covenant compliance, and the funding of dividends, capital spending and any future repurchases.
- China product-registration and permit progress, as well as the timing and cost of the ERP implementation.
- Developments in tax contingencies, litigation and product-liability exposures, including any changes to estimated potential payments.