Nature’s Sunshine Products, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results; amounts below are in U.S. dollars. The company sells nutritional and personal-care products primarily through independent consultants.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $104.5m | $114.7m | $319.2m | $326.1m |
| Gross profit / margin | $74.9m / 71.6% | $85.3m / 74.4% | $225.6m / 70.7% | $241.3m / 74.0% |
| Operating income / margin | $5.0m / 4.8% | $10.0m / 8.7% | $12.1m / 3.8% | $27.1m / 8.3% |
| Net income (loss) | $0.2m | $5.5m | $(1.5)m | $16.4m |
| Net income (loss) attributable to common shareholders | $0.09m | $4.9m | $(2.3)m | $15.4m |
| EPS attributable to common shareholders | $0.00, rounded | $0.24 | $(0.12) | $0.77 basic |
For the nine-month period, operating cash flow was $(2.9)m, versus $20.3m provided in 2021; capital expenditures were $4.7m. Operating cash flow less capital expenditures was approximately $(7.6)m. Cash declined $29.2m to $57.0m, including a $6.3m adverse effect from exchange rates.
At September 30, cash was $57.0m and working capital was $78.9m. Cash included $54.1m held in foreign markets, potentially subject to withholding taxes or repatriation restrictions. The company had no borrowings under its $25m revolving facility and $1.5m outstanding under an equipment financing agreement ($1.3m current). Operating lease liabilities totaled approximately $18.5m. The company reported compliance with credit-facility covenants.
Changes and operating drivers
- Q3 sales fell 8.9% in reported dollars, but 2.3% excluding currency effects; the stronger U.S. dollar reduced quarterly sales by about $7.6m. Nine-month sales declined 2.1% reported but increased 2.6% excluding currency.
- Q3 sales fell across Europe (11.4%), North America (16.5%), and Latin America and Other (14.5%). Asia declined 1.1% reported, but grew 11.9% in local currencies. Taiwan growth was offset by weakness in China, where COVID-related restrictions and lockdowns affected activity.
- Q3 gross margin contracted 2.8 percentage points. Cost of sales as a share of sales rose to 28.4% from 25.6%, reflecting inventory valuation reserves, market mix, inflation, foreign exchange, and higher input, production, and transportation costs. Nine-month inventory valuation charges totaled $5.0m, including $1.7m related to the Russia-Ukraine conflict.
- Q3 SG&A declined $2.7m in dollars but rose to 35.2% of sales from 34.4%; lower China service fees, Russia-related costs and compensation were partly offset by event, promotion, and marketing costs. Nine-month SG&A increased to $114.3m from $108.7m.
- Other loss was $2.3m in Q3 and $3.0m year to date, primarily from foreign-exchange losses. The nine-month income-tax provision was $10.6m, exceeding pretax income of $9.0m; the 117% effective rate chiefly reflected a valuation allowance against deferred tax assets.
Outlook, risks, and unusual items
- No numerical earnings or sales guidance is provided. Management said available cash and expected operating cash generation should fund normal operating needs and capital expenditures, but cautioned that prolonged downturns, weaker demand, tax outcomes, or contingencies could impair liquidity.
- Management expects inflation and foreign-exchange movements to remain relevant pressures. It also cited continuing uncertainty from COVID-19 and supply-chain disruptions.
- The Russia-Ukraine conflict continued to affect the Europe region. The company recorded a $2.3m pretax charge for the first nine months, primarily for inventory impairment and contractual obligations related to Russian operations. Russia and Other sales were $38.9m year to date, compared with $42.9m; management expects effects to continue.
- The company repurchased 834,000 shares for $12.9m in the first nine months and had $24.6m remaining under its repurchase authorization. No dividends were declared in 2022; the 2021 $1.00-per-share special dividend was nonrecurring.
- Potential future payments for non-income-tax contingencies were estimated at $0–$2.7m; other litigation-related payments at $0–$0.3m. The filing describes legal matters as uncertain and notes that unfavorable outcomes could be material. Management reported disclosure controls effective and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether sales trends and consultant activity stabilize, particularly in North America, Europe, China, and Russia and neighboring markets.
- Whether inventory reserves, inflation, and logistics costs continue to pressure gross margin and cash conversion.
- How foreign-exchange movements and the concentration of cash outside the U.S. affect reported results and accessible liquidity.
- Whether tax valuation allowances, open tax examinations, and non-income-tax or legal contingencies require further charges or payments.
- Whether continued share repurchases remain appropriate given negative year-to-date operating cash flow and the reduced cash balance.