Nature’s Sunshine Products, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. The company sells nutritional and personal-care products primarily through independent consultants. Financial amounts below are in U.S. dollars; “m” means millions.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $109.0m | $87.3m | $211.4m | $183.2m |
| Gross profit / margin | $80.5m / 73.9% | $64.3m / 73.6% | $156.0m / 73.8% | $135.5m / 74.0% |
| Operating income / margin | $9.5m / 8.7% | $6.6m / 7.6% | $17.1m / 8.1% | $13.8m / 7.5% |
| Net income | $6.8m | $6.1m | $10.9m | $9.1m |
| Net income attributable to common shareholders | $6.5m | $5.8m | $10.6m | $8.7m |
| Diluted EPS | $0.32 | $0.29 | $0.52 | $0.44 |
| Operating cash flow | Not presented for quarter alone | Not presented for quarter alone | $10.7m | $14.4m |
Q2 net sales increased 24.9% year over year, or 20.7% excluding currency effects; the stronger U.S. dollar comparison added approximately $3.6m to reported sales. For the first half, sales rose 15.4%, or 12.0% excluding currency effects. Q2 growth was reported across all four segments: Asia +32.9%, Europe +38.7%, North America +8.4%, and Latin America and Other +44.0%.
Q2 volume incentives were 32.5% of sales versus 33.4% a year earlier; SG&A was 32.7% in both periods. First-half gross margin declined to 73.8% from 74.0%, with the filing citing higher transportation costs and market mix. First-half other loss was $1.4m versus a $0.9m loss in 2020. The Q2 effective tax rate rose to 32.2% from 24.4%; the first-half rate was 30.4% versus 28.9%, primarily reflecting transfer-pricing adjustments, nondeductible executive compensation and foreign tax items, partly offset by stock-compensation deductions.
Liquidity, cash flow and capital allocation
- At June 30, cash and cash equivalents were $74.9m, down from $92.1m at year-end 2020. Working capital was $78.7m, versus $84.4m at year-end. Of cash, $59.6m was held in foreign markets and may face repatriation taxes or restrictions.
- First-half operating cash flow was $10.7m; investing outflow was $2.9m, mainly capital expenditures; financing outflow was $23.6m. Operating cash flow fell from $14.4m, mainly due to inventory investment and timing of receivable collections.
- Total liabilities were $86.0m. Interest-bearing debt included $3.0m under the equipment financing agreement, of which $1.2m was current; there were no borrowings under the $25m revolving credit facility. The company reported compliance with credit covenants.
- The company paid a one-time $1.00-per-share dividend totaling $19.9m in April and repurchased 77,000 shares for $1.5m during Q2. A $15m repurchase authorization had $13.5m remaining at quarter-end.
Outlook, risks and notable matters
- Management stated that available cash and operating cash generation should fund normal operating needs, including capital expenditures, in the short and long term. The filing provides no specific revenue, earnings or margin guidance.
- Management attributed sales growth partly to demand for nutritional supplements during COVID-19, promotions and consultant-engagement initiatives. It cautioned that pandemic-related restrictions and disruption to the global supply chain remained uncertain, and the duration and financial impact could not be reasonably estimated.
- Key disclosed exposures include foreign-exchange movements, supply-chain delays and ingredient shortages, product and direct-selling regulation, consultant retention and conduct, China joint-venture matters, cybersecurity and privacy, and tax uncertainty.
- The company disclosed legal proceedings and non-income-tax contingencies. Accrued liabilities included $0.2m for non-income-tax contingencies and $0.5m for other litigation; estimated possible future payments were stated as up to approximately $2.8m and $0.3m, respectively. Outcomes remain uncertain.
- No material changes to the risk factors from the 2020 Form 10-K were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the sales growth, particularly in Asia and Europe, persists after pandemic-related demand, promotions and favorable currency translation are considered.
- Whether operating-margin improvement can continue while selling costs rise, and how freight costs, market mix and consultant incentive plans affect margins.
- Cash conversion and liquidity trends, including inventory and receivables, the location and accessibility of foreign-held cash, and the impact of the special dividend and repurchases.
- Tax-rate variability, transfer-pricing exposures, and the eventual outcomes of disclosed tax and legal contingencies.
- Potential effects of COVID-19, supply constraints, foreign exchange and regulatory changes on operations and future results.