Nature’s Sunshine Products, Inc. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020. The company manufactures and sells nutritional and personal-care products primarily through independent distributors. Results are unaudited and compared with Q1 2019.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $95.9 million | $91.3 million | +5.1% reported; +6.6% in local currencies |
| Gross profit / margin | $71.2 million / 74.3% | $67.8 million / 74.3% | Margin unchanged |
| Operating income / margin | $7.2 million / 7.5% | $3.0 million / 3.3% | +140.5% |
| Net income | $3.0 million | $1.7 million | +73.9% |
| Net income attributable to common shareholders / diluted EPS | $3.0 million / $0.15 | $1.8 million / $0.09 | EPS increased $0.06 |
| Operating cash flow | $13.5 million | $(3.9) million | Improved $17.4 million |
Gross margin was 74.3%; volume incentives rose to 34.4% of sales from 34.0%. SG&A fell 8.2% to $31.1 million, or 32.4% of sales versus 37.1%, mainly reflecting prior restructuring, lower headcount, and other cost reductions. Other loss was $2.4 million, primarily foreign-exchange losses, compared with $0.05 million in Q1 2019. The effective tax rate was 36.7%, versus 41.0%.
Segments and material changes
- Europe: Sales increased 32.2% to $20.6 million (33.5% in local currency), supported by distributor engagement and supplement demand.
- North America: Sales increased 6.1% to $38.8 million; U.S. sales rose 5.5%. The company cited brand and distributor-tool initiatives, the qemp CBD launch, and increased supplement demand.
- Asia: Sales decreased 7.9% to $31.0 million (down 4.6% in local currency), as pandemic-related restrictions reduced distributor meetings and sales activity.
- Latin America and Other: Sales were approximately flat at $5.6 million, up 2.4% in local currency.
Foreign exchange reduced reported sales by approximately $1.4 million. Distributor counts also changed: active distributors and customers rose to 248,300 from 232,800, while active managers increased to 15,200 from 14,000.
Liquidity, debt, and cash flow
At March 31, 2020, cash and cash equivalents were $64.1 million, versus $53.6 million at year-end; working capital was $60.6 million. Of cash, $39.9 million was held outside the U.S. and may face withholding taxes or other repatriation restrictions. Operating activities provided $13.5 million; investing activities used $1.2 million, principally for capital expenditures; financing activities used $0.2 million. Operating cash flow benefited in part from the timing of working-capital payments and receipts.
No amount was outstanding under the $25 million revolving credit facility at quarter-end; the company reported covenant compliance. The facility was scheduled to mature July 11, 2020. A related-party note payable of $1.5 million was reported as a current liability. Subsequent to quarter-end, the company obtained a $5.4 million PPP loan on April 14, 2020, and entered into a separate equipment credit agreement with a $6.0 million limit on April 21; neither had an outstanding balance under the equipment agreement at inception.
Outlook, risks, and contingencies
The filing provides no quantified financial guidance. Management said operating cash, existing cash, and available resources should cover normal needs if COVID-19 disruption is minimized, but the duration and financial impact of the pandemic could not be reasonably estimated. Management warned that facility closure, supply-chain or workforce disruption, weaker demand, and distributor restrictions could materially affect operations. Q1 demand gains in North America and Europe may not continue; Asia was already adversely affected.
In May 2020, the company announced significant distributor compensation-plan changes and said effects on retention, recruitment, and costs were uncertain. The $5.4 million PPP loan may be only partly or not at all forgiven; eligibility and the company’s certification could be reviewed, with potential repayment, penalties, or reputational harm. The loan was received after quarter-end.
The company disclosed various legal proceedings and tax contingencies. Accrued non-income tax contingencies were $0.3 million, with possible future payments estimated at $0 to $2.7 million; other proceedings had $0.4 million accrued, with possible payments estimated at $0 to $0.3 million. Management said outcomes remain uncertain. Other principal risks include foreign-exchange exposure, distributor dependence, product and manufacturing regulation, cybersecurity, and international-market risks.
Most important facts for investors to verify
- Whether COVID-19-related sales trends and restrictions persisted after Q1, particularly in Asia and in North America and Europe.
- Whether operating cash generation was sustainable, given management’s stated working-capital timing effects.
- The status, maturity, and terms of the revolving facility, and whether the PPP loan was forgiven or repaid.
- The effects of the announced distributor compensation-plan changes on distributor activity, sales, and incentive expense.
- Developments in foreign-exchange losses, cash repatriation constraints, and disclosed tax and legal contingencies.