Business context and reporting period
Nature’s Sunshine Products, Inc. (NASDAQ: NATR) filed this Form 10-K for the fiscal year ended December 31, 2015. The company manufactures and directly sells nutritional and personal-care products through independent distributors, and reports four segments: NSP Americas, NSP Russia/Central and Eastern Europe, Synergy Worldwide, and China and New Markets. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $324.7 million | $366.4 million |
| Gross profit / margin | $239.4 million / 73.7% | $274.8 million / 75.0% |
| Operating income / margin | $13.9 million / 4.3% | $19.0 million / 5.2% |
| Income from continuing operations | $11.5 million | $19.8 million |
| Net income attributable to common shareholders | $14.7 million | $10.0 million |
| Diluted EPS attributable to common shareholders | $0.77 | $0.56 |
| Cash from operations | $10.2 million | $14.2 million |
Net income attributable to common shareholders includes discontinued operations; continuing-operations diluted EPS was $0.66 in 2015 versus $1.12 in 2014. The 2015 result also included $2.1 million of income from discontinued operations, compared with a $10.0 million loss in 2014.
- At year-end, cash and cash equivalents were $41.4 million, working capital was $48.4 million, and short-term available-for-sale investments were $1.8 million. Of cash, $38.4 million was held in foreign markets and may face tax or other repatriation restrictions.
- Capital expenditures were approximately $22.5 million; investing cash outflow was $18.6 million. Financing cash outflow was $7.6 million, including $7.5 million in dividends and $6.6 million in share repurchases, partly offset by option proceeds and $2.7 million of revolving-credit borrowings.
- There was no long-term debt at year-end. The company had $2.7 million outstanding on its $25 million revolving facility, with $22.3 million available, and reported compliance with covenants.
- Four quarterly dividends of $0.10 per share were paid in 2015. The $20 million repurchase authorization had $13.4 million remaining at year-end.
Material changes versus the prior comparable period
- Sales declined 11.4% year over year, or 6.7% excluding currency effects. Currency movements reduced sales by an estimated $16.7 million; stronger U.S. dollar effects also pressured margins.
- NSP Russia, Central and Eastern Europe sales fell 45.5% to $27.4 million amid political instability, sanctions and currency devaluation. Synergy Worldwide sales fell 10.9% to $114.1 million (down 1.8% in local currencies); NSP Americas fell 1.8% to $179.2 million (up 1.0% in local currencies). China and New Markets sales declined 27.4% to $4.1 million.
- Gross margin fell 1.3 percentage points, primarily because U.S.-made products became more expensive in foreign markets. Volume incentives declined to 36.3% of sales from 37.1%, partly reflecting lower sales mix in Russia, where commission rates were higher.
- SG&A decreased $12.2 million to $107.7 million, but rose to 33.2% of sales from 32.7% as revenue contracted. The decrease reflected lower market-related costs, benefits and foreign-currency translation, partly offset by $3.3 million of restructuring costs and $4.0 million of increased China investment.
- Active distributors and customers decreased to approximately 264,400 from 292,600; active managers declined to 12,700 from 13,400. The largest declines were in Russia/Central and Eastern Europe.
- Operating cash flow decreased to $10.2 million from $14.2 million. Cash and cash equivalents declined $17.3 million during the year.
Outlook, management commentary, risks and unusual items
- No specific consolidated revenue or earnings guidance is provided. Management expected Russia/Central and Eastern Europe sales to remain under pressure in the near term and did not expect a near-term reversal, citing regional political conditions, sanctions and currency devaluation.
- China expansion remains dependent on product registrations, permits and licenses. The company indefinitely deferred entry into China’s retail channel following a regulatory change; sales reported in China and New Markets were wholesale sales to foreign markets outside China.
- The company planned to complete its worldwide Oracle ERP implementation by early 2017. It also announced a 2015 restructuring that eliminated approximately 100 positions, ceased Vietnam operations and incurred $3.3 million of non-recurring costs.
- Other notable items: the company received $1.3 million from sales of Venezuelan fixed assets and released $1.3 million of prior Brazil-related accruals, contributing to discontinued-operations income in 2015. Venezuela operations had ceased in 2014 after import, cash-repatriation and inflation difficulties.
- In September 2015, the New York Attorney General sent a cease-and-desist letter to the company and other retailers concerning Devil’s Claw supplements and requested information about manufacture and sale. The filing says the company believes it is lawfully selling these products; the matter illustrates heightened supplement-industry scrutiny.
- Key risks include regulation of supplements, product claims and direct selling; distributor recruitment and retention; currency and geopolitical exposure; China licensing and joint-venture execution; tax and transfer-pricing assessments; product liability; inventory obsolescence; and information-security or ERP implementation failures. The company disclosed various legal matters and estimated possible payments of $0–$0.2 million for certain other litigation and $0–$2.9 million for non-income-tax contingencies; outcomes remain uncertain.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. Management and the auditor concluded internal control over financial reporting was effective as of year-end.
Most important facts for investors to verify
- Whether the sharp Russia/Central and Eastern Europe decline stabilizes, and how currency movements and distributor counts affect reported and local-currency sales.
- Whether the margin contraction persists as the sales mix and cost of U.S.-manufactured products evolve.
- How much of reported earnings depends on discontinued-operation proceeds/releases and volatile tax items, versus continuing operations and cash generation.
- Restrictions on repatriating the $38.4 million held by foreign subsidiaries, and the company’s capacity to sustain dividends, repurchases and capital investment while operating cash flow is lower.
- Progress and spending on the ERP program, China approvals and the Devil’s Claw inquiry, alongside updates to tax, legal and product-liability contingencies.