Nature’s Sunshine Products, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results. The company manufactures and directly sells nutritional and personal-care products through independent distributors.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $83.1 million | $82.4 million |
| Gross profit / margin | $61.4 million / 73.9% | $60.4 million / 73.3% |
| Operating income / margin | $2.1 million / 2.5% | $2.1 million / 2.6% |
| Net income | $1.9 million | $1.8 million |
| Net income attributable to common shareholders | $2.2 million | $2.1 million |
| Basic and diluted EPS | $0.11 | $0.11 |
| Operating cash flow | $0.8 million | $2.9 million |
| Capital expenditures | $2.7 million | $1.3 million |
| Cash dividends declared per share | $0.10 | $0.10 |
Gross margin improved as cost of sales fell to 26.1% of revenue from 26.7%. Volume incentives declined to 34.9% of sales from 36.3%, while SG&A rose 6.9% to $30.3 million, or 36.5% of sales versus 34.4%. The effective tax rate was 44.0%, down from 51.4%; foreign losses, primarily in China, that did not provide tax benefits remained a factor.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $33.1 million, current assets $97.7 million, current liabilities $66.7 million, and working capital $31.0 million.
- Cash was $29.2 million at foreign subsidiaries and may face restrictions or taxes upon repatriation.
- Revolving-credit borrowings were $13.3 million, up from $9.9 million at year-end, under a $25 million facility bearing 2.13% interest at quarter-end. The facility matures September 1, 2017; the company reported compliance with financial covenants. The agreement was amended March 31 to eliminate the consecutive-quarterly-net-loss covenant.
- Operating cash flow fell year over year, while investing used $2.2 million and financing provided $0.9 million. Cash ended the quarter at $33.1 million, compared with $46.4 million a year earlier.
Changes and operating developments
- Consolidated sales increased 0.8% reported and 0.4% in local currencies. Favorable currency translation added approximately $0.4 million.
- China and New Markets sales rose to $3.5 million from $1.0 million, largely from pre-opening product sales through Hong Kong. The company had not received a China direct-selling license and could not predict whether or when one would be granted. China sales carried $0.9 million of service fees in SG&A.
- NSP Russia, Central and Eastern Europe sales increased 19.8% to $7.6 million. NSP Americas declined 1.2% to $44.6 million, and Synergy Worldwide declined 8.5% to $27.3 million (9.7% lower in local currencies).
- Active distributors and customers totaled 236,200, down from 253,400 a year earlier. NSP Americas and Synergy both reported declines in active distributor/customer counts.
- Net income attributable to common shareholders increased to $2.16 million from $2.07 million, while operating income was slightly lower. The company reported $1.3 million of other income, primarily foreign-exchange gains.
Outlook, risks and unusual items
- The Oracle ERP implementation began April 2, 2017 for NSP Americas and certain corporate operations. The company disclosed approximately $47.8 million invested in information systems as of March 31 and expects about $7.0 million of additional annualized operating costs, including approximately $4.8 million of depreciation and $2.0 million of non-capitalizable internal labor. Management warned implementation could negatively affect revenue and profitability in Q2 and through the remainder of 2017.
- Management said available cash, cash generated from operations, and capital capacity should fund normal operating needs, including capital expenditures. No specific revenue or earnings guidance was provided.
- Key exposures include distributor recruitment and retention, China licensing and regulatory requirements, currency movements, Russia/Ukraine political and economic conditions, South Korea geopolitical and economic pressures, and product and direct-selling regulation. The company does not use foreign-exchange derivatives.
- Accrued unrecognized income-tax positions were approximately $6.8 million. Accrued non-income-tax contingencies were $0.3 million, with possible future payments estimated at $0–$4.8 million; other litigation accruals were $0.8 million, with possible payments estimated at $0–$0.5 million. Management cautioned that outcomes are uncertain.
- The company declared a $0.10-per-share dividend, paid April 3, 2017. No common-stock repurchases occurred during the quarter; $13.4 million remained authorized for repurchases.
Most important facts for investors to verify
- Progress, costs, and any sales or operating disruption from the Oracle ERP rollout.
- Renewal or replacement of the $25 million credit facility before its September 1, 2017 maturity, and covenant headroom.
- Whether China licensing advances and whether Hong Kong pre-opening sales and associated service costs are sustainable.
- Distributor/customer trends and sales performance in NSP Americas, Synergy, South Korea, and Russia/Ukraine.
- Cash conversion, foreign-cash accessibility, and the eventual outcomes of tax and other contingencies.