Nature’s Sunshine Products, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. The company manufactures and sells nutritional and personal-care products primarily through independent consultants.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $100.3 million | $88.5 million | $283.5 million | $270.5 million |
| Gross profit / margin | $73.1 million / 72.9% | $65.7 million / 74.3% | $208.6 million / 73.6% | $200.4 million / 74.1% |
| Operating income / margin | $5.5 million / 5.5% | $4.7 million / 5.3% | $19.2 million / 6.8% | $12.2 million / 4.5% |
| Net income | $7.2 million | $1.4 million | $16.3 million | $5.7 million |
| Net income attributable to common shareholders / diluted EPS | $6.8 million / $0.34 | $1.3 million / $0.07 | $15.5 million / $0.78 | $5.8 million / $0.29 |
Q3 sales rose 13.2% year over year (13.1% excluding currency); nine-month sales increased 4.8% (5.8% excluding currency). Q3 operating income increased 16.4%; year-to-date operating income rose 57.4%. Cost of sales as a share of revenue increased in both periods, which management attributed primarily to unfavorable market mix. SG&A fell as a percentage of sales, while volume incentives were 34.2% of Q3 sales versus 33.7% a year earlier.
Cash, liquidity and debt
- Cash and cash equivalents were $82.3 million at September 30, 2020, versus $53.6 million at December 31, 2019. Of the September balance, $53.2 million was held in foreign markets and may face repatriation restrictions or taxes.
- Working capital was $79.2 million, up from $54.8 million at year-end 2019. Nine-month operating cash flow was $26.8 million, compared with $5.5 million in 2019; investing cash outflow was $3.5 million and financing cash inflow was $5.0 million.
- The company had $5.4 million outstanding on its Paycheck Protection Program (PPP) loan; $3.3 million was classified as current. It intended to repay the loan in full and said forgiveness appeared unlikely. The revolving credit facility had no balance outstanding; the company reported compliance with its covenants.
- Total liabilities were $89.2 million. The filing reports no off-balance-sheet arrangements.
Material changes and management commentary
- Q3 sales grew across all segments: Asia 13.0%, Europe 23.0%, North America 9.9%, and Latin America and Other 9.7%. For the first nine months, Europe increased 19.4% and North America 5.2%, while Asia declined 0.6% and Latin America and Other declined 3.8%.
- Management cited increased demand for nutritional supplements during the pandemic, alongside government restrictions that limited consultant meetings and created supply-chain uncertainty. It said the duration and financial impact of disruption could not be reasonably estimated.
- The company continued a North America and Latin America transformation, including new branding, a website and a revised consultant compensation plan. Q3 SG&A increased $2.1 million, partly from growth-oriented selling costs, virtual events and the new plan. Nine-month SG&A declined $3.2 million, reflecting restructuring, lower travel and event costs, and other savings.
- Q3 other income was $0.7 million, compared with a $1.2 million loss in 2019, primarily reflecting foreign-exchange effects. Q3 income taxes included a $1.0 million benefit; management attributed the lower tax burden mainly to reductions in uncertain tax liabilities and release of a valuation allowance. The nine-month effective tax rate was 14.2%, versus 49.2% in 2019.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management stated that cash from operations and available cash should fund normal operating needs and capital expenditures, but warned that prolonged economic weakness, lower product demand, tax matters or non-income-tax contingencies could impair long-term liquidity. Principal disclosed risks include COVID-19 effects on consultants, employees and supply chains; foreign-exchange exposure; changing direct-selling rules and consultant retention; cybersecurity and privacy; manufacturing and supplier disruptions; and uncertainty around the new compensation plan.
The company disclosed legal proceedings and tax contingencies whose outcomes are uncertain. Estimated future payments for non-income-tax matters could range from $0 to approximately $2.4 million; other litigation payments were estimated at $0 to approximately $0.3 million. The company also warned that the $5.4 million PPP loan could be subject to repayment, government review, penalties or reputational harm if eligibility or certification were challenged.
Important facts for investors to verify
- Whether PPP forgiveness is pursued or granted, and any consequences of SBA review of the loan.
- Whether Q3 sales growth and demand persist as pandemic restrictions and consumer behavior change.
- How the revised consultant compensation plan affects sales, incentive expense, consultant retention and recruiting.
- Whether foreign-held cash can be accessed as needed and how currency movements affect reported results.
- Potential outcomes and cash costs of tax, legal and other contingencies, and whether gross-margin pressure from market mix continues.