Nature’s Sunshine Products, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company manufactures and sells nutritional and personal-care products, primarily through independent consultants. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $104.2m | $109.0m | $214.7m | $211.4m |
| Gross profit / margin | $74.7m / 71.7% | $80.5m / 73.9% | $150.7m / 70.2% | $156.0m / 73.8% |
| Operating income / margin | $5.8m / 5.5% | $9.5m / 8.7% | $7.1m / 3.3% | $17.1m / 8.1% |
| Net income (loss) | $1.0m | $6.8m | $(1.7)m | $10.9m |
| Net income (loss) attributable to common shareholders; diluted EPS | $0.5m; $0.03 | $6.5m; $0.32 | $(2.4)m; $(0.12) | $10.6m; $0.52 |
- Cash flow: First-half operating cash flow was $(9.3)m, versus $10.7m provided in 2021; capital spending was $3.8m. Financing activities used $14.0m, including $12.0m of share repurchases. Cash declined $29.8m to $56.3m.
- Liquidity and debt: Working capital was $78.0m, down from $88.0m at year-end 2021. Cash included $4.9m in the U.S. and $51.4m in foreign markets, potentially subject to repatriation restrictions or taxes. The company had $1.8m of equipment-related debt outstanding ($1.3m current) and no balance on its revolving facility. It reported covenant compliance.
- Balance sheet: Total assets were $233.1m, total liabilities $88.6m, and shareholders’ equity $144.5m. Inventory increased to $70.6m from $60.9m at year-end.
Changes versus the prior comparable period
- Q2 sales fell 4.4% in reported dollars, but rose 0.5% excluding foreign-exchange effects. For the first half, reported sales rose 1.5%, or 5.2% excluding currency effects. A stronger U.S. dollar reduced Q2 sales by approximately $5.4m and first-half sales by $7.8m.
- Q2 sales increased 8.8% in Asia and declined 20.3% in Europe, 8.8% in North America, and 15.4% in Latin America and Other. First-half Asia growth was 17.9%, while the other three segments declined.
- Profitability weakened: Q2 operating income fell 39.3% and common-shareholder earnings fell to $0.5m from $6.5m. First-half common-shareholder results shifted from $10.6m earnings to a $2.4m loss.
- Cost of sales rose to 28.3% of Q2 sales from 26.1%; SG&A rose to 35.4% from 32.7%. Volume incentives declined as a share of sales to 30.8% from 32.5%.
- No dividend was declared in the first half of 2022; the comparable 2021 period included a special $1.00-per-share dividend totaling $19.9m.
Outlook, commentary, risks, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said available cash and expected operating cash generation should fund normal needs, but warned that prolonged economic weakness, lower demand, or unfavorable tax-contingency outcomes could impair long-term liquidity.
- Management cited inflation in raw materials, labor, production, distribution, and transportation; supply-chain disruptions and product stockouts; COVID-19-related restrictions, including China lockdowns; and currency movements. These factors affected costs, availability, and consumer order sizes.
- The Russia-Ukraine conflict reduced activity in the Russia and Other market. The company recorded a $3.1m first-half pretax charge, primarily for inventory impairment and contractual obligations. Separately, it recorded $5.0m of incremental inventory valuation charges, including $2.7m related to the conflict and $2.3m related to forecast-demand and production issues.
- First-half effective tax rate was 127.5%, primarily because the company recorded a valuation allowance against deferred tax assets expected to expire before use. The tax provision was $8.0m despite a pretax profit of $6.3m.
- Potential future payments for non-income-tax contingencies were estimated at $0–$2.8m; other litigation-related payments at $0–$0.4m. The company had $0.5m accrued for other legal proceedings and $0.2m for non-income-tax contingencies. Management said outcomes remain uncertain. Part II reports no legal proceedings, while the notes describe ongoing disputes and proceedings.
- The $25m revolving credit agreement was amended to extend maturity to July 1, 2027, with potential increases in borrowing capacity. The company reported no off-balance-sheet arrangements and said disclosure controls were effective.
Important facts for investors to verify
- Whether sales and margins recover as inflation, foreign exchange, supply constraints, and regional demand conditions evolve.
- Whether higher inventory levels and the recorded valuation charges adequately reflect future demand, product availability, and Russia-related exposure.
- Cash generation and the accessibility of foreign-held cash, especially given first-half operating cash outflow and continued repurchases.
- The sustainability of earnings and the impact of deferred-tax-asset valuation allowances and open tax examinations.
- Developments in Russia and Ukraine, COVID-19 restrictions, and the disclosed ranges for tax and legal contingencies.