Nature’s Sunshine Products, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company manufactures and sells nutritional and personal-care products primarily through independent consultants. Financial amounts below are in U.S. dollars; unless noted, figures are in millions.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $102.4 | $95.9 | +6.8% (+4.0% in local currencies) |
| Gross profit / margin | $75.4 / 73.7% | $71.2 / 74.3% | Profit +5.9%; margin -0.6 percentage points |
| Operating income / margin | $7.6 / 7.5% | $7.2 / 7.5% | +6.6% |
| Net income | $4.2 | $3.0 | +38.1% |
| Net income attributable to common shareholders | $4.0 | $3.0 | Basic and diluted EPS: $0.20 vs. $0.15 |
| Operating cash flow | $2.7 | $13.5 | Down $10.8 |
| Capital expenditures | $1.0 | $1.2 | Operating cash flow less capex: $1.8 vs. $12.3 |
Cost of sales rose 9.3%, faster than sales, and increased to 26.3% of revenue from 25.7%, primarily due to additional inventory reserves and unfavorable market mix. Volume incentives declined to 33.4% of sales from 34.4%; SG&A increased 8.0% to $33.6 million, or 32.8% of sales, from 32.4%. The lower effective tax rate—27.2% versus 36.7%—helped lift net income; the company attributed the difference mainly to changes in foreign-loss tax effects and favorable stock-compensation deductions.
Sales trends and material changes
- Sales growth included an estimated $2.7 million favorable foreign-exchange impact. In local currencies, Asia grew 9.1%, Europe 4.6%, Latin America and Other 21.1%, while North America declined 3.0%.
- Asia sales rose 15.5% to $35.8 million; Europe rose 7.6% to $22.2 million; North America fell 2.6% to $37.8 million; Latin America and Other rose 20.1% to $6.7 million.
- Management cited demand for nutritional supplements during the pandemic, promotions and consultant-engagement initiatives as contributors to growth. South Korea sales declined 9.6%, with restrictions limiting consultant meetings; U.S. sales fell 2.6%, partly reflecting a strong COVID-related buying surge in Q1 2020.
- Other loss improved to $1.9 million from $2.4 million, primarily reflecting foreign-exchange gains and losses.
Liquidity, debt and capital allocation
- At March 31, cash and cash equivalents were $91.3 million, including $55.5 million held in foreign markets that may face repatriation taxes or restrictions. Working capital was $71.7 million, down from $84.4 million at year-end 2020.
- Total liabilities were $104.3 million, versus $92.3 million at December 31, 2020. The increase included a $19.9 million accrued dividend payable. Current liabilities were $83.1 million; current assets were $154.8 million.
- Equipment-related debt was $3.3 million, including $1.2 million current. The $25 million revolving credit facility had no borrowings outstanding; it matures July 1, 2023. The company reported compliance with its covenants.
- The company declared a $1.00-per-share dividend, totaling approximately $19.9 million, recorded as a reduction in retained earnings and an accrued payable. The cash flow statement does not show a dividend payment during the quarter.
- Management said available cash and expected operating cash flows should fund normal operating needs and capital expenditures. Operating cash flow fell mainly because of timing in receivables, accrued liabilities, and consultant incentives and service fees.
Outlook, risks and contingencies
- No quantified financial guidance was provided. Management said the duration and financial impact of COVID-19 disruptions could not be reasonably estimated. It noted that restrictions may limit consultant activity and that the pandemic and related supply-chain challenges could materially affect results.
- Key disclosed exposures include dependence on consultant numbers and productivity; direct-selling and product regulation; product liability; foreign-exchange movements; supply-chain and ingredient availability; cybersecurity and privacy; and geopolitical, trade and tax risks.
- The company reported various legal proceedings and disputes, but no specific legal proceedings under Part II. It stated that outcomes are uncertain. Accrued non-income-tax contingencies were $0.2 million, with possible future payments estimated at $0–$2.4 million; other litigation-related payments were estimated at $0–$0.2 million. Certain matters have no provision because losses are not considered probable or cannot currently be estimated.
- Management reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2021.
Important facts for investors to verify
- Whether sales growth persists after pandemic-related demand and promotions, particularly in Asia, and whether North America stabilizes.
- Whether gross-margin pressure from inventory reserves and market mix continues, and whether higher selling costs generate profitable growth.
- Whether operating cash flow recovers from the working-capital timing effects and how the declared dividend is paid and funded.
- Availability and repatriation of foreign-held cash, debt repayment, and continued compliance with credit-facility covenants.
- Developments in COVID-19 restrictions, supply-chain conditions, foreign exchange, tax exposures, and the disclosed legal and non-income-tax contingencies.