Nature’s Sunshine Products Reports Third Quarter 2017 Financial Results

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Nature’s Sunshine Products Reports Third Quarter 2017 Financial Results

  • Third quarter net sales of $89.3 million were up 4.5 percent year-over-year 
  • Net income of $2.4 million attributable to common shareholders, or $0.13 per diluted common share during the third quarter
  • Third quarter Adjusted EBITDA of $4.7 million

Nature’s Sunshine Products, Inc., a leading natural health and wellness company engaged in the manufacture and direct selling of nutritional and personal care products, is reported its financial results for the third quarter ended September 30, 2017.

Management Commentary

“We are pleased to report improved third quarter sales performance, returning to both year-over-year and sequential growth led by a recovery at Synergy Worldwide and strong growth in China,” commented Gregory L. Probert, Chairman and Chief Executive Officer. “The disruptions that impacted sales earlier in the year have moderated with enhanced distributor engagement in Korea and improvements in the performance in North America. We will continue to focus on regaining sales growth in these two markets while driving continued growth in China as we expand our direct selling efforts. The growth at Synergy Worldwide was led by strength in Japan and our NSP business in Russia, Central and Eastern Europe contributed another quarter of growth.”

Mr. Probert continued, “After a period of significant investments, both in China and the ERP system implemented earlier this year, we are now focused on leveraging our China investments to build a long-term profitable and growing business in this promising market. Additionally, we have made significant progress migrating to the new ERP system after a period of disruptions and still have opportunities for improvement. Accordingly, we are continuing our efforts to ensure improved conversion of sales growth into profit enhancements that will drive shareholder value.”

Third Quarter 2017 Financial Highlights

  • Net sales of $89.3 million increased 4.5 percent, compared to $85.4 million in the third quarter of 2016. On a local currency basis, net sales increased 4.3 percent as compared to the third quarter of 2016. China and New Markets net sales increased approximately 44.5 percent, compared to the same period in 2016. Synergy WorldWide net sales increased approximately 10.0 percent compared to the same period in 2016 (or 10.7 percent in local currencies). NSP Russia, Central and Eastern Europe net sales increased approximately 11.0 percent compared to the same period in 2016. NSP Americas net sales decreased approximately 4.5 percent compared to the same period in 2016 (or 5.2 percent in local currencies). Net sales were impacted by $0.2 million of favorable foreign currency exchange rate fluctuations.The Company began the initial implementation of its Oracle ERP system on April 2, 2017, for the Company’s NSP Americas segment as well other corporate operations. The implementation of Oracle ERP negatively impacted net sales and profitability during the second and third quarters of 2017, primarily by causing wait times for calls into the Company’s call center to be longer than usual and by causing difficulties within the Company’s on-line product ordering system. The Company is addressing these issues and other issues relating to the implementation of the Oracle ERP system. The Company anticipates that the implementation of the Oracle ERP system may continue to negatively impact net sales and profitability going forward.In the second quarter of 2016, the Company began making pre-opening product sales through Hong Kong while awaiting its direct selling license in China. During the second quarter of 2017, the Company received its direct selling license in China, which allows the Company to expand its business scope in China to include direct selling activities.
  • Net income attributable to common shareholders was $2.4 million, or $0.13 per diluted common share, compared to net income of $4.2 million attributable to common shareholders, or $0.22 per diluted common share, in the third quarter of 2016.
  • The Company’s net loss in China attributable to common shareholders was approximately $0.03 per share.
  • Adjusted EBITDA was $4.7 million, compared to $7.1 million in the third quarter of 2016. Adjusted EBITDA, which is a non-GAAP financial measure, is defined here as net income from continuing operations before income taxes, depreciation, amortization, share-based compensation expense and other income/loss.

First Nine Months of 2017 Financial Highlights

  • Net sales of $253.7 million decreased 1.3 percent, compared to $257.2 million in 2016. On a local currency basis, net sales decreased 1.5 percent as compared to 2016. China and New Markets net sales increased approximately 37.2 percent compared to the same period in 2016. NSP Russia, Central and Eastern Europe net sales increased approximately 12.4 percent compared to the same period in 2016. NSP Americas net sales decreased approximately 5.9 percent compared to the same period in 2016 (or 6.0 percent in local currencies). Synergy WorldWide net sales decreased approximately 2.2 percent compared to the same period in 2016 (or 2.4 percent in local currencies). A modest overall weakening of the U.S. dollar versus local currencies resulted in an approximate 0.2 percent or $0.4 million increase of its net sales during the period.
  • Net income attributable to common shareholders was $4.4 million, or $0.23 per diluted common share, compared to $8.8 million, or $0.46 per diluted common share, in 2016.
  • The Company’s net loss in China attributable to common shareholders was approximately $0.15 per share.
  • Adjusted EBITDA was $12.2 million compared to $17.4 million in 2016.

Third Quarter 2017 and 2016 Regional Sales by Operating Segment

Net Sales by Operating Segment
Three
Months
Ended
September
30, 2017
Three
Months
Ended
September
30, 2016
Percent
Change
Impact of
Currency
Exchange
Percent
Change
Excluding
Impact of
Currency
NSP Americas:
NSP North America $ 34,896 $ 36,479 (4.3 )% $ 105 (4.6 )%
NSP Latin America 6,405 6,781 (5.5 )% 176 (8.1 )%
41,301 43,260 (4.5 % 281 (5.2 )%
NSP Russia, Central and Eastern Europe   7,129 6,421 11.0 % 79 9.8 %
Synergy WorldWide:
Synergy Asia Pacific 25,829 22,637 14.1 % (538 ) 16.5 %
Synergy Europe 5,924 6,107 (3.0 )% 328 (8.4 )%
Synergy North America 2,717 2,587 5.0 % 5.0 %
34,470 31,331 10.0 % (210 ) 10.7 %
China and New Markets   6,401 4,429 44.5 % 44.5 %
$ 89,301 $ 85,441 4.5 % $ 150 4.3 %

Nine Months of 2017 and 2016 Regional Sales by Operating Segment

Net Sales by Operating Segment
Nine Months
Ended
September
30, 2017
Nine Months
Ended
September
30, 2016
Percent
Change
Impact of
Currency
Exchange
Percent
Change
Excluding
Impact of
Currency
NSP Americas:
NSP North America $ 106,132 $ 112,224 (5.4 )% $ 83 (5.5 )%
NSP Latin America 19,235 20,944 (8.2 )% 54 (8.4 )%
125,367 133,168 (5.9 )% 137 (6.0 )%
NSP Russia, Central and Eastern Europe   21,398 19,042 12.4 % 61 12.1 %
Synergy WorldWide:
Synergy Asia Pacific 65,881 66,850 (1.4 )% 272 (1.9 )%
Synergy Europe 17,946 19,101 (6.0 )% (52 ) (5.8 )%
Synergy North America 8,319 8,241 0.9 % 0.9 %
92,146 94,192 (2.2 )% 220 (2.4 )%
China and New Markets $ 14,832 $ 10,807 37.2 % $ 37.2 %
$ 253,743 $ 257,209 (1.3 )% $ 418 (1.5 )%

Active Distributors and Customers by Segment as of September 30 (1)

2017 2016
Distributors
& Customers
Managers Distributors
& Customers
Managers
NSP Americas 107,300 5,900 125,900 6,500
NSP Russia, Central and Eastern Europe 61,000 2,900 60,600 2,600
Synergy WorldWide 45,100 4,600 55,600 4,100
Total 213,400 13,400 242,100 13,200

(1) Active Distributors and customers include Nature’s Sunshine Products’ independent Distributors and customers who have purchased products directly from the Company for resale and/or personal consumption during the previous three months ended as of the date indicated.  Total Managers, Distributors and Customers, which include those who have made a purchase in the last twelve months, was 498,000 as of September 30, 2017.

In China, the Company does not sell its products through Managers and Distributors, but rather through independent service providers who are compensated for marketing, sales support, and other services.

Cash Flow and Balance Sheet Highlights

  • Net cash provided by operating activities was $8.0 million for the nine months ended September 30, 2017, as compared to $5.1 million for the nine months ended September 30, 2016.
     
  • Total assets on September 30, 2017 were $222.2 million, compared to $205.6 million on December 31, 2016.

Conference Call

Nature’s Sunshine Products will host a conference call to discuss its third quarter 2017 results on November 8, 2017 at 5:30 PM Eastern Time. The toll-free dial-in number for callers in the U.S. and Canada is 1-877-423-9813, conference ID: 13672822. International callers can dial 1-201-689-8573, conference ID: 13672822. A replay will be available from November 8, 2017 at 8:30 PM Eastern Time through November 22, 2017 at 11:59 PM Eastern Time by dialing 1-844-512-2921 (U.S. and Canada) or 1-412-317-6671 (International), replay PIN: 13672822. The call will also be webcast live and will be available on the Investors section of Nature’s Sunshine Products’ website at www.naturessunshine.com for 90 days.

 

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements regarding the Company’s future business expectations, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to the Company’s objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that the Company intends, expects, projects, believes or anticipates will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, including the following.

  • changes in laws and regulations, or their interpretation, applicable to direct selling or the nutritional supplement industry may prohibit or restrict the Company’s ability to sell its products in some markets or require the Company to make changes to its business model in some markets;
  • legal challenges to its direct selling program or to the classification of its independent distributors;
  • complex legal and regulatory requirements in China, including the failure to obtain the necessary approvals and licenses to expand its direct sales activities in China;
  • extensive government regulations to which its products, business practices and manufacturing activities are subject;
  • the impact of anti-bribery laws, including the U.S. Foreign Corrupt Practices Act;
  • the full implementation of its joint venture for operations in China with Fosun Industrial Co., Ltd.;
  • registration of products for sale in China, or difficulty or increased cost of importing products into China;
  • its business practices in some of the jurisdictions in which it operates, including China and South Korea, where the business practices may be legal and compliant with local and foreign law, but still draw unnecessary media or regulatory attention;
  • its ability to attract and retain independent distributors;
  • the effect of fluctuating foreign exchange rates;
  • negative consequences resulting from difficult economic conditions, including the availability of liquidity or the willingness of its customers to purchase products;
  • geopolitical issues and conflicts;
  • restrictions on the repatriation of money;
  • uncertainties relating to the application of transfer pricing, duties, value-added taxes, and other tax regulations, and changes thereto;
  • changes in tax laws, treaties or regulations, or their interpretation;
  • taxation relating to its independent distributors;
  • high levels of inflation in one or more of the countries in which the Company operates;
  • cyber security threats and exposure to data loss;
  • reliance on information technology infrastructure;
  • liabilities and obligations arising from improper activity by its agents, employees or independent distributors;
  • its relationship with, and its inability to influence the actions of, its independent distributors, and other third parties with whom it does business;
  • its reliance upon, or the loss or departure of any member of, its senior management team;
  • challenges in managing rapid growth in China;
  • the slowing of the Chinese economy;
  • negative effects from its independent distributor promotions or compensation plans;
  • risks associated with the manufacturing of the Company’s products;
  • availability and integrity of raw materials;
  • obsolescence of product inventory;
  • changing consumer preferences and demands;
  • the competitive nature of its business and the nutritional supplement industry;
  • negative publicity related to its products, ingredients, or direct selling organization and the nutritional supplement industry;
  • product liability claims;
  • the sufficiency of trademarks and other intellectual property rights; and
  • reliance on third-parties to distribute its products and provide support services to independent distributors.

These and other risks and uncertainties that could cause actual results to differ from predicted results are more fully detailed under the caption “Risk Factors” in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K and Quarterly Reports filed on Forms 10-Q.

All forward-looking statements speak only as of the date of this press release and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this press release. Except as is required by law, the Company expressly disclaims any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this press release.

Non-GAAP Financial Measures

The Company has included information which has not been prepared in accordance with generally accepted accounting principles (GAAP), such as information concerning Adjusted EBITDA and net sales excluding the impact of foreign currency exchange fluctuations.  Management utilizes the non-GAAP measure Adjusted EBITDA in the evaluation of its operations and believes that this measure is a useful indicator of the Company’s ability to fund its business. This non-GAAP financial measure should not be considered as an alternative to, or more meaningful than, U.S. GAAP net income (loss) as an indicator of the Company’s operating performance.  Moreover, Adjusted EBITDA, as presented by the Company, may not be comparable to similarly titled measures reported by other companies.

In addition, the Company believes presenting the impact of foreign currency fluctuations is useful to investors because it allows a more meaningful comparison of net sales of its foreign operations from period to period. Net sales excluding the impact of foreign currency fluctuations should not be considered in isolation or as an alternative to net sales in U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP.

Other companies may use the same or similarly named measures, but exclude different items, which may not provide investors with a comparable view of Nature’s Sunshine Products’ performance in relation to other companies. The Company has included a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, in the attached financial tables.

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share information)
(Unaudited)
  Three Months Ended
 September 30,
  2017 2016
Net sales $ 89,301 $ 85,441
Cost of sales 23,505   21,512
Gross profit 65,796 63,929
Operating expenses:
Volume incentives 30,716 29,684
Selling, general and administrative 32,926 29,187
Operating income 2,154   5,058
Other income, net 193   20
Income before provision for income taxes 2,347   5,078
Provision (benefit) for income taxes (1 ) 1,136
Net income 2,348   3,942
Net loss attributable to noncontrolling interests (95 ) (213 )
Net income attributable to common shareholders $ 2,443   $ 4,155
Basic and diluted net income per common share:
Basic earnings per share attributable to common shareholders $ 0.13   $ 0.22
Diluted earnings per share attributable to common shareholders $ 0.13   $ 0.22
Weighted average basic common shares outstanding 18,897 18,751
Weighted average diluted common shares outstanding 19,286 19,255
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share information)
(Unaudited)
  Nine Months Ended June 30,
  2017 2016
Net sales $ 253,743 $ 257,209
Cost of sales 66,430   66,610
Gross profit 187,313 190,599
Operating expenses:
Volume incentives 87,987 90,352
Selling, general and administrative 95,098 88,821
Operating income 4,228   11,426
Other income, net 1,909   957
Income before provision for income taxes 6,137   12,383
Provision for income taxes 2,346 4,286
Net income 3,791   8,097
Net loss attributable to noncontrolling interests (625 ) (695 )
Net income attributable to common shareholders $ 4,416   $ 8,792
Basic and diluted net income per common share:
Basic earnings per share attributable to common shareholders $ 0.23   $ 0.47
Diluted earnings per share attributable to common shareholders $ 0.23   $ 0.46
Weighted average basic common shares outstanding 18,873 18,723
Weighted average diluted common shares outstanding 19,265 18,995
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
  September 30,
 2017
December 31,
2016
Assets
Current assets:
Cash and cash equivalents $ 47,692 $ 32,284
Accounts receivable, net of allowance for doubtful accounts of $187 and $205, respectively 10,927 7,738
Investments available for sale 1,776
Assets held for sale 998     521
Inventories 49,442 47,597
Prepaid expenses and other 5,253 4,585
Total current assets 114,312 94,501
 
Property, plant and equipment, net 70,175 73,272
Investment securities – trading 1,907 1,391
Intangible assets, net 984 976
Deferred income tax assets 21,395 21,590
Other assets 13,436 13,840
$ 222,209 $ 205,570
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 4,850 $ 5,305
Accrued volume incentives and service fees 20,930 16,264
Accrued liabilities 25,040 24,400
Deferred revenue 4,790 3,672
Revolving credit facility 9,919
Income taxes payable 2,552   3,475
Related party note payable 500
Total current liabilities 58,662 63,035
 
Revolving credit facility 19,184
Liability related to unrecognized tax benefits 4,944 6,755
Deferred compensation payable 1,907 1,391
Other liabilities 1,196 1,991
Total liabilities 85,893 73,172
Shareholders’ equity:
Common stock, no par value; 50,000 shares authorized, 18,902 and 18,757 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively 131,141 129,654
Retained earnings 15,286 12,718
Noncontrolling interests 661 1,286
Accumulated other comprehensive loss (10,772 ) (11,260 )
Total shareholders’ equity 136,316 132,398
$ 222,209 $ 205,570
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
  Nine Months Ended
September 30,
  2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,791 $ 8,097
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for doubtful accounts (22 ) 270
Depreciation and amortization 6,036 3,610
Share-based compensation expense 1,904 2,412
Loss on sale of property and equipment 145
Deferred income taxes 245 311
Purchase of trading investment securities (450 ) (340 )
Proceeds from sale of trading investment securities 102 84
Realized and unrealized gains on investments (145 ) (96 )
Foreign exchange gains (2,089 ) (501 )
Changes in assets and liabilities:
Accounts receivable (3,115 ) 409
Inventories (616 ) (9,875 )
Prepaid expenses and other (573 )   102
Other assets 799   (771 )
Accounts payable (422 ) 328
Accrued volume incentives and service fees 4,240 2,721
Accrued liabilities (621 )   301
Deferred revenue 1,118   (847 )
Income taxes payable (847 )   111
Liability related to unrecognized tax positions (1,815 ) (1,744 )
Deferred compensation payable 516 335
Net cash provided by operating activities 8,036     5,062
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,889 ) (7,929 )
Proceeds from sale of property, plant and equipment 522
Proceeds from sale/maturities of investments available for sale 1,776  
Net cash used in investing activities (1,591 ) (7,929 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends (1,848 ) (5,632 )
Proceeds from new revolving credit facility 19,184
Net borrowings on original revolving credit facility (9,996 )   6,311
Net borrowings from related party 500
Proceeds from exercise of stock options 104 128
Payment of withholding taxes related to the vesting of restricted stock units (521 )   (169 )
Net cash provided by financing activities 7,423   638
Effect of exchange rates on cash and cash equivalents 1,540   1,252
Net increase (decrease) in cash and cash equivalents 15,408   (977 )
Cash and cash equivalents at beginning of the period 32,284 41,420
Cash and cash equivalents at end of the period $ 47,692 $ 40,443
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(Amounts in thousands)
(Unaudited)
  Three Months Ended
September 30,
  2017 2016
Net income $ 2,348   $ 3,942
Adjustments:
Depreciation and amortization 2,451 1,214
Share-based compensation expense 142 826
Other income, net* (193 ) (20 )
Provision (benefit) for income taxes (1 ) 1,136
Adjusted EBITDA $ 4,747 $ 7,098

 

  Nine Months Ended
September 30,
  2017 2016
Net income $ 3,791 $ 8,097
Adjustments:
Depreciation and amortization 6,036 3,610
Share-based compensation expense 1,904 2,412
Other income, net* (1,909 )   (957 )
Provision for income taxes 2,346 4,286
Adjusted EBITDA $ 12,168 $ 17,448

* Other income, net, is primarily comprised of foreign exchange gains (losses), interest income, and interest expense.

 

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