Business context and reporting period
Nature’s Sunshine Products, Inc. (Nasdaq: NATR) manufactures and direct-sells nutritional and personal-care products through independent consultants. This Form 10-K covers the fiscal year ended December 31, 2020; quarterly figures below include the three months ended December 31, 2020 (unaudited). Unless noted otherwise, financial amounts are in U.S. dollars.
Financial performance and position
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Net sales | $385.2 million | $362.2 million |
| Gross profit / margin | $283.9 million / 73.7% | $268.3 million / 74.1% |
| Operating income / margin | $21.5 million / 5.6% | $16.1 million / 4.5% |
| Net income | $23.0 million | $6.9 million |
| Net income attributable to common shareholders | $21.3 million; diluted EPS $1.07 | $6.8 million; diluted EPS $0.34 |
| Cash from operating activities | $37.7 million | $8.5 million |
| Capital expenditures | $4.9 million | $5.1 million |
| Cash and working capital at year-end | $92.1 million / $84.4 million | $53.6 million / $54.8 million |
Gross margin was pressured by market mix, free-shipping promotions and higher inventory obsolescence reserves. Operating expenses included $131.2 million of volume incentives and $131.3 million of selling, general and administrative expenses. The effective tax rate was a benefit of 0.6%, versus expense of 55.7% in 2019, chiefly reflecting valuation-allowance releases and other tax items.
At December 31, 2020, debt outstanding was $3.7 million under an equipment financing agreement; $1.3 million was current. The company had no balance drawn on its $25 million revolving credit facility, which was extended to July 2023, and reported covenant compliance. Cash held in foreign markets was $51.1 million and may be subject to repatriation restrictions or taxes. No dividends were declared in 2020.
Material changes versus the prior comparable period
- Annual sales rose 6.3% (6.6% excluding currency effects). Europe increased 24.3%, North America 5.3%, Asia 0.1%, and Latin America and Other 1.4% in reported dollars.
- Operating income increased 33% to $21.5 million; operating margin rose from 4.5% to 5.6%. SG&A increased $2.6 million in dollars but declined as a share of sales, from 35.5% to 34.1%.
- Operating cash flow increased to $37.7 million, partly due to improved operating results and timing of working-capital payments. Cash rose $38.4 million during the year.
- Fourth-quarter sales were $101.7 million versus $91.7 million a year earlier. Fourth-quarter operating income was $2.2 million versus $3.9 million, while net income attributable to common shareholders was $5.9 million versus $1.0 million. The quarter included a $2.8 million income-tax benefit.
- The company repaid its $5.4 million Paycheck Protection Program loan in December 2020. It also implemented significant consultant compensation-plan changes in North America and Latin America during 2020.
Outlook, commentary, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management said cash generated from operations and available cash should fund normal operating needs, including capital expenditures, but could not reasonably estimate the duration or financial effects of COVID-19 disruption. Management reported increased demand for nutritional supplements during 2020, alongside restrictions that limited consultant meetings and uncertainty in global supply chains.
Key risks include dependence on independent consultants and a small number of large sales networks in some markets; direct-selling, product-claims, product-registration and manufacturing regulation; China regulatory and joint-venture exposure; rapidly changing rules affecting CBD products; foreign-exchange movements; and tax, litigation, product-liability, cybersecurity and privacy exposures. A 10% strengthening of the U.S. dollar was estimated to reduce 2020 operating income by $2.1 million, all else equal.
Unusual or judgment-sensitive items include the 2020 income-tax benefit and $6.1 million reduction in the tax valuation allowance; $0.8 million of restructuring expenses; and a $6.4 million accrual for incentive-trip costs, although traditional trips were not held during 2020. The company reported various legal proceedings and accrued $0.5 million for certain litigation; it stated that additional possible losses could not be fully estimated. Deloitte issued unqualified opinions on the financial statements and internal controls. The auditor identified deferred-tax-asset valuation allowances as a critical audit matter.
Most important facts for investors to verify
- Whether sales growth and improved operating margins persist, particularly after the pandemic-related demand effects and compensation-plan changes.
- How much of the reported earnings improvement depended on tax benefits, foreign-exchange gains and timing-related cash-flow movements.
- The accessibility of foreign-held cash and the company’s ability to maintain liquidity if demand, supply chains or repatriation conditions worsen.
- Developments in direct-selling and product regulations, China operations, CBD rules, and the company’s tax and litigation contingencies.
- Future working-capital requirements, inventory obsolescence, consultant retention and the treatment of potential claims or assessments.