Nature’s Sunshine Products, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The company manufactures and sells nutritional and personal care products, primarily through independent consultants and direct customer sales. Financial amounts below are in U.S. dollars; millions are rounded.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $111.0 million | $108.6 million | +2.2% reported; +3.8% in local currencies |
| Gross profit / margin | $79.0 million / 71.2% | $76.9 million / 70.8% | +2.6% gross profit |
| Operating income / margin | $4.6 million / 4.2% | $0.2 million / 0.2% | +$4.5 million |
| Net income | $2.5 million | $1.3 million | +$1.2 million |
| Net income attributable to common shareholders | $2.3 million; $0.12 diluted EPS | $0.9 million; $0.04 diluted EPS | Higher earnings per share |
| Operating cash flow | $2.2 million | $9.3 million | Down $7.1 million |
Gross margin improved as market mix, pricing and margin initiatives outweighed inflation and unfavorable currency effects. SG&A fell $2.9 million to $40.8 million, mainly because Q1 2023 included a non-recurring Japan loss; digital-growth investment partly offset the reduction. Volume incentives were $33.6 million, or 30.2% of sales, versus 30.5% a year earlier. Other income declined to $31,000 from $1.5 million, partially offsetting operating improvement. The effective tax rate rose to 46.5% from 25.7%, primarily due to foreign branch-related tax and foreign losses that provide no current tax benefit.
Segments and material changes
- Asia: Sales of $46.2 million, down 0.3% reported but up 5.2% in local currencies; currency reduced sales by approximately $2.5 million. China sales declined amid challenging macroeconomic conditions; Taiwan and South Korea grew.
- Europe: Sales of $22.3 million, up 4.2% reported and 1.9% in local currencies. Eastern Europe sales were $14.7 million, versus $14.5 million; regional operating income was $1.6 million, versus $0.5 million.
- North America: Sales of $36.5 million, up 5.4%, including U.S. growth attributed to digital sales, field initiatives and new customers.
- Latin America and Other: Sales of $6.0 million, down 4.6% reported and 8.0% in local currencies.
Liquidity, debt and capital
Cash was $77.8 million at March 31, versus $82.4 million at year-end. Of the quarter-end cash, $73.0 million was held outside the U.S. and may be subject to withholding taxes or other repatriation restrictions. Working capital was $91.3 million, compared with $89.1 million at December 31. Operating cash flow was lower mainly due to payment timing for accrued liabilities and accounts payable and timing of receivable collections. Capital expenditures were $3.7 million; financing activities provided $0.1 million. Foreign-exchange effects reduced cash by $3.2 million.
Revolver borrowings were $2.1 million at quarter-end, compared with none at year-end; the facility matures July 2027 and carried a stated 6.84% rate. The company reported compliance with debt covenants. It repurchased 105,000 shares for $1.8 million and had $15.8 million remaining under its repurchase authorization. Management believes operating cash generation and available cash will fund normal short- and long-term operating needs, including capital expenditures.
Outlook, risks and unusual items
- No numerical full-year sales or earnings guidance is provided. Management discusses expected improvement in gross profit and gross margin but gives no quantified target.
- Management cites inflation in materials, labor, production and transportation; foreign-exchange exposure; consultant recruitment and productivity; regulation of products and direct selling; supply-chain risks; and geopolitical and economic uncertainty.
- The Russia-Ukraine conflict continues to affect Eastern Europe operations, which management expects to remain reduced versus pre-conflict levels. Escalation or broader economic effects could adversely affect sales, earnings and cash flows.
- Legal proceedings and disputes are discussed in the notes, with uncertain outcomes. The company recorded $0.5 million for estimated outcomes of other proceedings; possible future payments on certain other litigation are estimated at $0–$0.4 million. Non-income tax contingency payments could range from $0–$3.4 million. The filing states no legal proceedings in Part II, while the notes describe proceedings and disputes.
- Unrecognized tax-position accruals increased to $0.6 million from $0.3 million. U.S. federal tax years 2020–2022 and certain foreign tax years 2018–2023 remain open to examination.
- A 2023 Japan fraud scheme caused $4.8 million in unauthorized wire transfers. Management says the related internal-control material weakness was remediated as of March 31, 2024, and management assessed internal controls as effective at quarter-end. The independent auditor had issued an adverse opinion on internal control over financial reporting as of December 31, 2023.
Important facts for investors to verify
- Whether sales growth and margin improvement persist, particularly after currency effects and the prior-year Japan loss.
- How consultant activity, China demand, Eastern Europe conditions and foreign exchange affect subsequent-quarter sales and profitability.
- Whether operating cash flow recovers and overseas cash is practically accessible for U.S. funding needs.
- Whether the Japan wire-transfer control remediation remains effective, given the auditor’s prior adverse ICFR opinion.
- Potential tax and legal exposures, including the stated contingency ranges and open tax examinations.