Nature’s Sunshine Products, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company manufactures and sells nutritional and personal care products primarily through independent distributors. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $87.3m | $90.7m | $183.2m | $182.0m |
| Gross profit / margin | $64.3m / 73.6% | $66.9m / 73.7% | $135.5m / 74.0% | $134.7m / 74.0% |
| Operating income / margin | $6.6m / 7.6% | $4.5m / 5.0% | $13.8m / 7.5% | $7.5m / 4.1% |
| Net income | $6.1m | $2.6m | $9.1m | $4.4m |
| Net income attributable to common shareholders | $5.8m; diluted EPS $0.29 | $2.7m; diluted EPS $0.14 | $8.7m; diluted EPS $0.44 | $4.4m; diluted EPS $0.23 |
For the six months, operating cash flow was $14.4m, versus cash used of $1.1m in 2019. Capital expenditures were $2.2m, and cash increased $16.6m to $70.3m. At June 30, working capital was $72.1m; $45.9m of cash was held in foreign markets and may face repatriation restrictions or taxes.
Total assets were $226.9m and total liabilities $87.7m. The company had $5.4m of PPP borrowing outstanding, with $2.4m classified as current; no balance was drawn on its $25m revolving facility. The revolver was extended to July 2023 and permits up to $15m in additional capacity, subject to its terms. The company reported compliance with debt covenants.
Changes and operating trends
- Q2 sales declined 3.8% year over year, or 2.1% excluding currency effects; first-half sales rose 0.7%, or 2.3% excluding currency effects. A stronger U.S. dollar reduced Q2 sales by about $1.5m and first-half sales by about $2.9m.
- Q2 segment sales: Asia fell 6.8%, Europe rose 2.6%, North America fell 0.4%, and Latin America and Other fell 21.7%. For the first half, Europe grew 17.7% and North America 2.9%, while Asia declined 7.3% and Latin America and Other declined 10.9%.
- Q2 SG&A fell $2.5m to $28.5m; first-half SG&A fell $5.3m to $59.6m. Management cited lower travel and event spending during COVID-19, prior restructuring and other cost reductions. Volume incentives as a share of sales also decreased.
- Q2 other income was $1.5m, primarily reflecting foreign-exchange gains; first-half other loss was $0.9m, primarily reflecting foreign-exchange effects. First-half net income more than doubled, with lower SG&A contributing to higher operating income.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said cash and operating cash generation should cover normal needs if COVID-19 disruption is minimized, but the duration and financial impact of the pandemic could not be reasonably estimated.
- COVID-19 restrictions reduced distributor meetings and sales activity in some markets, particularly South Korea and Latin America. Europe experienced increased demand; U.S. first-half growth reflected, among other factors, supplement demand and brand initiatives. Management cautioned that U.S. results may not continue.
- The company received a $5.4m PPP loan. Forgiveness is uncertain, and the filing notes headcount reductions may limit the eligible amount. The SBA indicated that loans exceeding $2m would receive a full review; potential repayment, penalties and reputational consequences are disclosed risks.
- In May 2020, the company announced significant distributor compensation-plan changes; management said their effects on distributor retention, costs and results are uncertain.
- Risks include disruption to manufacturing or suppliers, distributor dependence, foreign-exchange movements, cybersecurity and privacy exposure, regulatory requirements, and legal or tax contingencies. Possible future payments were estimated at up to $2.5m for certain non-income-tax matters and up to $0.3m for other litigation where losses were reasonably possible. The company also reported $1.4m accrued for unrecognized tax positions.
Important facts for investors to verify
- Whether sales and distributor activity recover in COVID-affected markets, and whether European and U.S. demand trends persist.
- The SBA’s determination on PPP eligibility and forgiveness, including the loan amount ultimately repayable.
- Whether distributor compensation-plan changes affect retention, sales, incentives or expenses.
- Foreign-exchange impacts, cash availability and restrictions on repatriating foreign-held funds.
- Developments in disclosed tax, legal and non-income-tax contingencies and any resulting cash costs.