Nature’s Sunshine Products, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited; comparisons are with the same 2011 periods unless noted. The company manufactures and direct-sells nutritional and personal-care products through independent distributors and managers. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $93.0 | $91.8 | $185.9 | $184.7 |
| Operating income | $10.3 | $8.1 | $19.5 | $15.7 |
| Operating margin | 11.1% | 8.8% | 10.5% | 8.5% |
| Net income | $7.3 | $5.6 | $14.5 | $12.2 |
| Diluted EPS | $0.46 | $0.36 | $0.91 | $0.78 |
| Operating cash flow | — | — | $9.2 | $15.8 |
- Q2 net sales rose 1.3%; operating income increased 28.1% and net income 29.8%. For the first half, sales increased 0.7%, operating income 24.3%, and net income 18.6%.
- Cost of goods sold was 18.4% of sales in Q2 and 19.1% year to date, versus 18.6% and 19.3%. Volume incentives were 36.1% of sales in both 2012 periods, compared with 36.4% for Q2 2011 and 36.7% for first-half 2011. SG&A was 34.4% of Q2 sales and 34.3% year to date, down from 36.2% and 35.5%.
- At June 30, cash and cash equivalents were $66.4; current assets $131.6; current liabilities $62.1; and working capital $69.5, versus $57.3 at year-end 2011. Of cash, $52.4 was held in foreign markets and could be subject to repatriation taxes or restrictions. Short-term investments available for use were $2.3.
- First-half operating cash flow fell to $9.2 from $15.8, primarily reflecting timing of payments and receipts; income-tax payments were $11.1 versus $2.7. Capital expenditures were $2.6 versus $0.7, including upgrades to the Spanish Fork facility, a new call center, and equipment purchases.
- Debt was $7.6, down from $9.2 at December 31, 2011, after $1.6 of principal payments. The $15.0 revolving facility was undrawn and available through August 2013; the company reported compliance with debt covenants. A $0.05-per-share dividend was paid in May.
Material changes and segment trends
- Synergy WorldWide was the principal growth driver: Q2 sales rose 14.8% (20.0% in local currencies), and first-half sales rose 14.0% (17.9% in local currencies). Growth was strongest in Europe and Korea; Japan declined.
- NSP International sales declined 5.5% in Q2 and 5.3% for the first half; reported local-currency declines were 4.0% and 4.1%. NSP United States sales declined 1.0% and 1.7%, respectively.
- Operating income improved partly because of lower Russian-business royalty and professional costs following the NutriPlus LLC settlement: Q2 costs were lower by about $2.1, including $1.3 of royalties and $0.8 of professional fees. International operating income also benefited, while the U.S. segment’s first-half operating income declined slightly.
- Foreign exchange was a headwind to sales in several markets. The filing also reports that a stronger U.S. dollar could reduce operating income; its sensitivity analysis estimates a 3.9% reduction for the first half under a hypothetical 10% strengthening.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said it expects cash, operating cash generation, working capital, and the undrawn credit line to meet foreseeable working-capital needs, while noting that prolonged economic weakness, lower product demand, or unfavorable tax or contingency outcomes could harm liquidity.
- Management cited distributor recruitment and retention, foreign exchange and currency controls, product and direct-selling regulation, raw-material and cost pressures, and dependence on the Spanish Fork manufacturing facility as risks. Peru’s regulatory changes restricted sales of several key products; Belarus’s currency and debt crisis weakened distributor purchasing power. Belarus and Venezuela were classified as highly inflationary economies.
- Legal proceedings include VAT assessments and other civil matters. No loss provision was recorded; management estimated possible future payments of $0 to approximately $1.0 and cautioned that an adverse outcome could be material. Accrued foreign non-income-tax contingencies were $6.8.
- Accrued unrecognized tax positions were $9.8. The IRS was auditing 2009 and 2010 returns; earlier transfer-pricing disputes for 2003–2008 had been settled, with required payments made by June 30. Management warned that ultimate tax outcomes could differ materially from estimates.
- Q2 effective tax rate was 30.5%, compared with 26.4%; first-half rate was 25.7%, compared with 21.1%. The 2012 rates reflected, among other items, a valuation-allowance release related to foreign tax credits. Rates may fluctuate across periods.
- Q2 comprehensive income was $6.8, below net income of $7.3, primarily reflecting foreign-currency translation losses. First-half translation loss was $0.4. Management also reported unusually high Synergy Japan product returns in Q1 tied to a promotion; returns were not attributed to product quality.
Important facts for investors to verify
- Whether Synergy’s growth in Europe and Korea continues and offsets weakness in NSP International and other declining markets.
- Whether operating-margin gains persist as Russian settlement-related cost savings compare against prior periods and SG&A costs evolve.
- Whether operating cash flow recovers after the lower first-half result and elevated tax payments and capital spending.
- Exposure and potential outcomes from IRS and foreign tax matters, non-income-tax accruals, and the disclosed legal proceedings.
- Effects of distributor retention, currency movements and restrictions, product regulation, and dependence on the Spanish Fork manufacturing facility.