Nature’s Sunshine Products, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; dollar amounts below are in U.S. dollars. The company manufactures and sells nutritional and personal care products, primarily through independent consultants.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $111.2m | $104.5m | $336.4m | $319.2m |
| Gross profit / margin | $81.2m / 73.1% | $74.9m / 71.6% | $242.8m / 72.2% | $225.6m / 70.7% |
| Operating income / margin | $5.8m / 5.2% | $5.0m / 4.8% | $13.0m / 3.9% | $12.1m / 3.8% |
| Net income (loss), consolidated | $3.1m | $0.2m | $7.1m | ($1.5m) |
| Net income (loss) attributable to common shareholders | $2.8m; $0.15 diluted EPS | $0.1m; EPS reported as — | $6.1m; $0.31 diluted EPS | ($2.3m); ($0.12) diluted EPS |
Q3 sales rose 6.4% year over year, or 7.1% excluding currency effects; nine-month sales rose 5.4%, or 7.9% excluding currency effects. Q3 cost of sales fell to 26.9% of sales from 28.4%, while SG&A rose to 37.1% from 35.2%. Effective tax rates remained elevated at 35.9% for Q3 and 43.6% for the nine-month period.
Cash, liquidity and debt
- Cash and cash equivalents were $76.0m at September 30, 2023, up from $60.0m at year-end 2022; working capital was $86.9m, versus $83.9m.
- Nine-month operating cash flow was $31.6m, compared with cash use of $2.9m in 2022. Management attributed the improvement partly to higher net income and timing of accrued-liability payments, inventory purchases and receivable collections.
- Investing cash use was $9.2m, primarily capital expenditures. Financing cash use was $3.4m, including $2.2m of share repurchases. Foreign-exchange movements reduced cash by $3.0m.
- No borrowings were outstanding on the $25m revolving credit facility; $0.2m remained on equipment-related debt. The company reported compliance with credit-facility covenants. Of cash on hand, $66.7m was held outside the U.S. and may be subject to repatriation restrictions or taxes.
Material changes and management commentary
- Asia and North America drove Q3 growth: sales increased 9.1% and 10.4%, respectively. Europe declined 2.9% and Latin America and Other declined 6.4%. Taiwan, Japan and China contributed to Asia growth; South Korea sales fell amid inflation-related customer sensitivity.
- Gross-margin improvement reflected market mix, price increases and contribution-margin initiatives, partly offset by inflation and unfavorable currency effects. SG&A growth reflected China service fees, compensation, sales-related variable costs, and investment in digital growth and strategic initiatives.
- Management stated that available cash and expected operating cash flows should fund normal operating needs, including capital expenditures, in the short and long term. The filing gives no specific revenue or earnings guidance.
- The company continues to cite inflation, foreign-exchange volatility, supply-chain and manufacturing risks, consultant recruitment and productivity, regulation, and geopolitical conditions as potential challenges. The Russia-Ukraine conflict is expected to affect business in the region for the foreseeable future.
Unusual items, controls and contingencies
- A criminal impersonation scheme at the wholly owned Japan subsidiary caused $4.8m of fraudulent wire transfers in February 2023. The company also incurred $1.0m of investigation and professional fees; total pretax SG&A charges were $5.8m for the nine months. The company reported no evidence of additional fraud or unauthorized access to consumer data.
- Management concluded disclosure controls and internal control over financial reporting were not effective at September 30, 2023, due to a material weakness in controls over wire transfers. Remediation measures—including stronger approvals, online-banking controls, centralized cash review and employee communications—were ongoing.
- Accrued liabilities included $0.3m for non-income tax contingencies and $0.5m for other litigation. The company estimates possible future payments of up to approximately $2.9m for non-income tax matters and $0.3m for other litigation; outcomes remain uncertain. It also disclosed open U.S. and foreign tax years and $0.2m of accrued unrecognized tax positions.
- The company repurchased 180,000 shares for $2.2m during the first nine months; $21.8m remained authorized under its repurchase program at quarter-end.
Important facts for investors to verify
- Whether wire-transfer control remediation is completed and independently tested, and whether any further fraud-related losses or recoveries arise.
- Whether sales growth and gross-margin gains persist, particularly in Asia and North America, and how currency movements affect reported results.
- Whether rising SG&A, elevated tax rates, inflation and consultant-related costs constrain earnings conversion despite revenue growth.
- How much foreign-held cash is practically available for U.S. needs, and whether operating cash flow remains strong when working-capital timing normalizes.
- Developments in Eastern Europe, tax examinations, legal proceedings and non-income tax contingencies.