Nature’s Sunshine Products, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context
The company manufactures and direct-sells nutritional and personal-care products through independent Managers and Distributors. It reports four segments: NSP Americas, NSP Russia, Central and Eastern Europe, Synergy WorldWide, and China and New Markets. Results are exposed to foreign-currency movements and market conditions in international operations.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $81.2 | $92.8 | $165.1 | $186.3 |
| Gross profit | $60.2 | $70.0 | $122.2 | $140.9 |
| Operating income | $3.2 | $5.8 | $8.5 | $12.7 |
| Continuing-operations net income | $2.4 | $3.6 | $6.6 | $13.8 |
| Net income attributable to common shareholders | $2.6 | $3.2 | $8.2 | $12.9 |
| Diluted EPS attributable to common shareholders | $0.13 | $0.20 | $0.43 | $0.79 |
- Margins: Gross margin was 74.1% in Q2 (75.4% prior year) and 74.0% for the half (75.6%). Operating margin was 3.9% (6.3%) and 5.2% (6.8%), respectively. Continuing-operations net margin was 2.9% (3.8%) in Q2 and 4.0% (7.4%) for the half.
- Cash flow: Six-month operating cash flow was $3.1, versus $8.1 a year earlier. Investing used $10.9, including $13.1 of capital expenditures; financing used $4.0. Cash fell $12.5 to $46.2.
- Liquidity and debt: Working capital was $58.3, compared with $63.3 at year-end 2014. Cash included $40.7 held by foreign subsidiaries, potentially subject to repatriation taxes or restrictions; unrestricted short-term investments were $1.8. No revolver borrowings were outstanding. The company had a $25.0 revolving facility maturing September 1, 2016, and reported compliance with its covenants.
- Capital returns: The company paid $3.7 in dividends and repurchased $3.8 of stock during the first half. Dividends declared were $0.10 per share in each quarter.
Changes versus the prior comparable period
- Q2 sales declined 12.5% in U.S. dollars and 7.7% excluding currency effects; first-half sales declined 11.4% and 7.2%, respectively. Currency reduced sales by approximately $4.5 in Q2 and $7.8 for the half.
- NSP Russia, Central and Eastern Europe sales fell 46.9% in Q2 and 48.9% for the half, amid political unrest, sanctions, currency devaluation, and lower Distributor activity. Active Managers and active Distributors/customers worldwide also declined year over year, to approximately 13,400 and 262,300.
- Q2 segment sales also decreased at Synergy WorldWide (12.3%), NSP Americas (2.7%), and China and New Markets (24.7%). Excluding currency, Synergy fell 2.4% in Q2, while NSP Americas was down 0.3%.
- Cost of sales rose as a share of revenue to 25.9% in Q2 and 26.0% for the half, partly reflecting currency and inventory-reserve changes. Volume incentives declined as a share of sales to 36.4% and 36.3%, respectively, partly due to sales mix.
- SG&A dollars declined, but SG&A rose as a percentage of sales to 33.7% in Q2 and 32.5% for the half, reflecting lower revenue and Q2 restructuring charges. The prior-year first-half tax benefit included a $6.7 benefit related to foreign tax credits; this makes the year-over-year comparison of net income particularly significant.
Outlook, commentary, risks, and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects continued significant pressure on the Russia, Central and Eastern Europe segment from political conditions, sanctions, and currency devaluation, and does not expect a near-term reversal. The company expects its streamlining plan to generate approximately $10–$15 in annualized savings; it expects up to $0.5 of additional restructuring costs in subsequent quarters.
- Restructuring: Announced in April 2015, the plan included ceasing Vietnam operations and eliminating approximately 100 positions worldwide through severance and attrition. Q2 incurred approximately $2.1 of non-recurring costs, including $1.96 severance and termination benefits; $1.12 remained unpaid at quarter-end.
- Discontinued operations: Operations in Venezuela ceased in November 2014. First-half 2015 discontinued-operations income of $1.3 primarily reflected proceeds from sales of Venezuelan fixed assets; the prior-year half reported a $0.9 loss.
- Other operating commentary: U.S. sales grew for a fourth consecutive quarter, according to management. Growth in Synergy Europe and Japan in local currencies was offset by weakness in South Korea and North America. China operations remained subject to regulatory product registrations and permit approvals; reported China and New Markets sales to date were export sales outside China.
- Key risks and contingencies: Currency exposure, distributor recruitment and retention, product and industry regulation, and geopolitical developments are material risks. The company reported $7.1 of liabilities for unrecognized income tax positions and $2.0 accrued for non-income-tax contingencies. Other litigation and foreign tax matters could result in losses; management said certain other proceedings could involve payments from $0 to approximately $0.5, but no loss provision was recorded for those matters. The filing states that litigation outcomes are uncertain and could adversely affect results.
- Other: The company does not use derivatives to hedge foreign exchange exposure. It plans to complete its worldwide Oracle ERP implementation by early 2017. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and Distributor activity in Russia, Central and Eastern Europe stabilize, and how much future performance depends on currency and geopolitical conditions.
- Whether reported restructuring savings of $10–$15 annually are achieved, and whether remaining restructuring costs stay within the stated estimate.
- Whether operating cash flow recovers while capital spending, dividends, and repurchases continue; also assess the availability of foreign-held cash for U.S. needs.
- How tax examinations, transfer-pricing exposures, non-income-tax contingencies, and legal proceedings ultimately affect cash and earnings.
- Whether local-currency sales trends, particularly in NSP Americas and Synergy markets, support improved consolidated performance despite foreign-exchange headwinds.