Nature’s Sunshine Products, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company sells nutritional and personal care products through independent consultants and direct-to-customer channels. Unless otherwise noted, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $116.5 | $104.2 | $225.2 | $214.7 |
| Gross profit | $84.6 | $74.7 | $161.6 | $150.7 |
| Gross margin | 72.6% | 71.7% | 71.7% | 70.2% |
| Operating income | $7.0 | $5.8 | $7.2 | $7.1 |
| Net income (loss) | $2.7 | $1.0 | $3.9 | $(1.7) |
| Net income (loss) attributable to common shareholders | $2.4 | $0.5 | $3.3 | $(2.4) |
| Diluted EPS | $0.12 | $0.03 | $0.17 | $(0.12) |
Q2 sales rose 11.9% year over year, or 14.4% excluding currency effects; first-half sales rose 4.9%, or 8.2% excluding currency effects. Q2 operating margin was 6.0% versus 5.5%; first-half operating margin was 3.2% versus 3.3%. Q2 net income increased despite higher other losses, while first-half net income turned positive, aided in part by a substantially lower tax provision than in 2022. Effective tax rates remained elevated at 55.0% for Q2 and 48.5% for the first half, reflecting foreign-operations tax adjustments and valuation allowances.
For Q2, Asia sales grew 15.8%, Europe 24.2%, North America 1.7%, and Latin America and Other 3.2%. For the first half, Asia and Europe grew 8.3% and 9.7%, while North America and Latin America and Other declined 1.1% and 1.7%. Foreign exchange reduced Q2 sales by about $2.6 million and first-half sales by about $7.2 million.
Cash, liquidity, and debt
- Operating cash flow was $17.3 million for the first half, versus cash used of $9.3 million in the prior-year period. Investing activities used $4.7 million, principally for capital expenditures; financing activities used $1.8 million.
- Cash and cash equivalents were $69.0 million at June 30, 2023, up from $60.0 million at December 31, 2022. Working capital was $84.9 million, compared with $83.9 million at year-end. Of cash, $59.3 million was held outside the U.S. and may face repatriation taxes or other restrictions.
- No balance was outstanding on the $25 million revolving credit facility, which matures July 1, 2027. The company had $0.5 million outstanding on its equipment-related loan, classified as current, and reported compliance with credit covenants.
- First-half share repurchases were $0.9 million; $23.1 million remained available under the repurchase authorization. The company stated that cash, operating cash generation, and available cash should fund normal operating needs, including capital expenditures.
Material changes, unusual items, and outlook
- Gross margin improved year over year, which management attributed to market mix and price increases, partly offset by inflation and unfavorable currency movements. Prior-year inventory valuation reserves related to the Russia-Ukraine conflict also affected comparability. SG&A rose 14.7% in Q2 and 10.9% in the first half, increasing as a share of sales.
- SG&A included a $5.8 million first-half charge related to a criminal scheme targeting the company’s wholly owned Synergy Japan subsidiary: $4.8 million in fraudulent wire transfers and $1.0 million in investigation and professional fees. The company reported no evidence of further fraud or unauthorized access to consumer information and said it did not expect an otherwise material business impact.
- The company identified a material weakness in internal control over financial reporting because controls did not prevent or timely detect the unauthorized transfers. Disclosure controls were also deemed ineffective as of June 30. Remediation actions—including stronger wire approval and online banking controls, centralized cash-management review, and increased internal communication—were ongoing and incomplete.
- No quantified financial guidance was provided. Management noted expectations for continued foreign-currency exposure and inflationary pressures, and said the Russia-Ukraine conflict could continue to affect the business. It also cited COVID-related uncertainty, consultant recruitment and retention, supply-chain disruptions, regulatory and product-liability exposure, and economic conditions as risks. Management cautioned that interim results are not necessarily indicative of full-year results.
- Legal proceedings are ongoing; management said outcomes cannot be predicted. Accrued non-income tax contingencies were $0.3 million, with possible future payments estimated at $0–$2.9 million. Other litigation accruals were $0.5 million, with possible future payments estimated at $0–$0.4 million.
Important facts for investors to verify
- Progress and effectiveness of remediation of the Japan wire-transfer control weakness, and whether any further losses or related costs arise.
- Whether sales growth—particularly in Asia and Europe—persists, and how currency movements affect reported results.
- Whether gross-margin gains continue and whether SG&A growth, including consultant incentives and compensation, remains controlled.
- Cash availability and restrictions on the substantial foreign-held balance, alongside the company’s capital spending and share repurchases.
- Potential changes in tax estimates, contingent liabilities, Russia-Ukraine exposure, and other legal or regulatory risks.