Nature’s Sunshine Products, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; dollar amounts below are in millions unless otherwise noted. The company manufactures and sells nutritional and personal-care products primarily through independent distributors and operates across Asia, Europe, North America, and Latin America and Other.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $88.5 | $88.8 | $270.5 | $267.4 |
| Gross profit / margin | $65.7 / 74.3% | $65.7 / 73.9% | $200.4 / 74.1% | $197.3 / 73.8% |
| Operating income / margin | $4.7 / 5.3% | $3.5 / 4.0% | $12.2 / 4.5% | $6.6 / 2.5% |
| Net income | $1.4 | $1.3 | $5.7 | $1.6 |
| Net income attributable to common shareholders | $1.3 | $1.5 | $5.8 | $2.1 |
| Diluted EPS | $0.07 | $0.08 | $0.29 | $0.11 |
| Operating cash flow | Not separately reported | Not separately reported | $5.5 | $14.2 |
- Q3 sales declined 0.3% year over year in reported dollars but rose 1.1% excluding currency effects. Nine-month sales rose 1.2% reported and 3.5% excluding currency effects.
- For the nine months, cost of sales fell to 25.9% of sales from 26.2%; volume incentives declined to 34.1% from 34.9%; SG&A declined to 35.5% from 36.4%. Management attributed improvements to market mix, fewer inventory write-offs, restructuring, lower headcount, and other cost reductions.
- Q3 operating income improved despite nearly flat sales, while common-shareholder earnings fell from $1.5 million to $1.3 million. Other loss increased to $1.2 million from $0.4 million, and the effective tax rate was 60.9% versus 57.6%.
- Nine-month net income improved substantially, partly alongside lower operating expenses and other loss. The effective tax rate remained elevated at 49.2%, down from 68.8% in the prior-year period.
Balance sheet, debt, and liquidity
- At September 30, cash and cash equivalents were $50.5 million, total current assets $108.5 million, and working capital $46.1 million. Cash was largely held outside the U.S.: $38.5 million abroad and $12.0 million in the U.S.; foreign cash may face withholding taxes or repatriation restrictions.
- Total assets were $214.7 million and total liabilities $88.0 million. The company reported no balance outstanding on its $25 million revolving credit facility and was in covenant compliance. The facility matures July 11, 2020.
- Operating lease liabilities totaled $26.1 million ($5.1 million current; $21.1 million long-term). The company adopted the new lease standard in January 2019, recording right-of-use assets and lease liabilities; adoption did not materially affect earnings or cash flows.
- Nine-month cash flow was $5.5 million provided by operations, $4.5 million used in investing (including $4.5 million of capital expenditures), and $0.1 million used in financing. Cash declined $0.1 million to $50.5 million, including a $1.0 million adverse foreign-exchange effect.
- Management stated that cash, cash generated from operations, and available liquidity should fund normal operating needs and capital expenditures. It cautioned that prolonged economic weakness, lower product demand, or unfavorable tax or non-income-tax outcomes could impair longer-term liquidity.
Material changes, outlook, and risks
- Regional results were mixed. Q3 Europe sales rose 12.0% and Asia declined 1.0% in reported dollars; North America fell 4.0% and Latin America and Other fell 1.7%. U.S. sales declined 5.6% in Q3, which management linked mainly to distributor recruiting and retention. Europe growth reflected improved distributor engagement; Japan and China also grew.
- For the first nine months, Asia sales increased 5.0% and Europe 8.9%, while North America declined 3.6% and Latin America and Other declined 8.5%, all in reported dollars. Foreign exchange reduced nine-month sales by approximately $6.2 million.
- The company realigned its reporting segments in Q2 2019 to geographic regions; comparative segment data were recast. Worldwide active distributors and customers rose to approximately 229,800 from 214,000, and active managers to 12,600 from 12,200. Management noted that U.S. distributor recruiting and retention remained a challenge.
- Q3 included a $0.6 million loss from writing off cumulative currency translation adjustments following a market closure. Restructuring expenses were $0.4 million in Q3 and $2.4 million for the nine months, versus $0.7 million in the comparable prior-year periods.
- Litigation and tax matters remain contingencies. Accrued liabilities for estimated litigation outcomes were $2.4 million at September 30; the company subsequently paid $2.0 million to settle litigation. Disclosed possible future payments were up to $3.2 million for non-income-tax matters and up to $0.4 million for certain other litigation. The IRS was examining the 2017 federal tax return; accrued unrecognized tax positions were $1.5 million.
- No quantitative earnings or sales guidance was provided. The filing identifies risks including regulation of direct selling and products, distributor recruitment and retention, foreign exchange, international operations, taxes, litigation, product liability, cybersecurity, and economic conditions. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Whether sales momentum and distributor recruitment improve in North America, particularly the United States, and whether growth in Europe and Asia continues.
- Whether operating-margin gains persist and whether elevated effective tax rates continue to constrain earnings attributable to common shareholders.
- Why operating cash flow fell to $5.5 million from $14.2 million year over year, including the effects of inventory and accrued-liability movements.
- Availability and repatriation of the $38.5 million of foreign-held cash, lease obligations, and refinancing or renewal plans for the credit facility maturing in July 2020.
- Final outcomes and cash costs of the disclosed litigation, tax examinations, and non-income-tax contingencies, including the subsequent $2.0 million settlement payment.