Nature’s Sunshine Products, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company manufactures and sells nutritional and personal-care products primarily through independent distributors. Dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $90.7 million | $91.3 million | $182.0 million | $178.6 million |
| Gross profit / margin | $66.9 million / 73.7% | $67.0 million / 73.4% | $134.7 million / 74.0% | $131.6 million / 73.7% |
| Operating income / margin | $4.5 million / 5.0% | $2.2 million / 2.4% | $7.5 million / 4.1% | $3.1 million / 1.7% |
| Net income attributable to common shareholders | $2.7 million; $0.14 per diluted share | $0.1 million; reported EPS rounded to — | $4.4 million; $0.23 per diluted share | $0.6 million; $0.03 per diluted share |
- Q2 sales declined 0.6% reported, but increased 2.3% in local currencies; foreign exchange reduced sales by approximately $2.6 million. Six-month sales rose 1.9% reported and 4.7% excluding currency effects.
- Q2 gross margin improved 0.3 percentage points; six-month gross margin improved 0.3 points. Management attributed lower cost of sales as a share of revenue to favorable market mix and fewer inventory write-offs.
- Q2 SG&A declined $2.3 million to $31.0 million, or 34.2% of sales versus 36.5%. Six-month SG&A declined $0.8 million to $64.9 million. Management cited restructuring, U.S. and Latin American headcount reductions, and other cost reductions.
- Other income was $0.3 million in both 2019 periods, compared with losses of $1.8 million in Q2 2018 and $1.1 million in the first half of 2018; 2019 primarily reflected foreign-exchange gains.
Cash, liquidity and obligations
- Cash and cash equivalents were $46.3 million at June 30, 2019, down $4.3 million from year-end 2018. Of the balance, $38.5 million was held outside the U.S. and may face repatriation taxes or other restrictions.
- Working capital was $42.0 million, compared with $40.1 million at December 31, 2018. Current assets were $105.6 million and current liabilities $63.6 million.
- Operating activities used $1.1 million of cash in the first half, versus generating $9.4 million a year earlier. Investing used $2.8 million, mostly capital expenditures; financing used $0.2 million. Management attributed the operating cash-flow decline mainly to timing of working-capital, lease and tax payments.
- No balance was outstanding on the $25 million revolving credit facility; it matures July 11, 2020. The company reported compliance with its covenants. It also had $1.6 million of current related-party notes payable.
- Adoption of lease accounting in 2019 resulted in $27.7 million of operating lease liabilities and $26.4 million of right-of-use assets at June 30. These are lease obligations, not revolving-credit borrowings.
Changes, outlook and risks
- Performance varied by region in Q2: Europe sales rose 8.3% and Asia declined 1.7% in reported dollars; North America fell 2.5% and Latin America and Other fell 3.2%. For the first half, Asia and Europe grew, while North America and Latin America and Other declined.
- U.S. sales weakness was linked to distributor recruiting and retention. Active worldwide distributors and customers increased to approximately 232,000 from 217,200, while active Managers declined to 12,900 from 13,100.
- The company realigned its operating segments around geographic regions across brands during Q2; comparative segment results were recast. It also adopted the new lease standard, which increased reported assets and liabilities but did not materially affect earnings or cash flows.
- Restructuring expenses were $0.4 million in Q2 and $2.0 million in the first half; accrued severance and restructuring costs were $1.0 million at June 30. The filing provides no quantified earnings or sales guidance. Management expects available cash and operating cash generation to fund normal needs, but cautions that weaker demand, economic conditions, tax outcomes or other factors could pressure long-term liquidity.
- Effective tax rates were elevated at 45.7% for Q2 and 43.9% for the first half, primarily due to foreign losses without expected tax benefits and other unfavorable foreign tax items. The IRS notified the company of an audit of its 2017 federal return; tax years 2015–2017 remain open federally.
- The company disclosed ongoing legal matters and non-income-tax contingencies. It accrued $0.3 million for non-income-tax matters, with potential future payments estimated at $0–$3.5 million; other litigation accruals were $2.0 million, with potential payments of $0–$0.4 million for matters where losses were possible or not estimable. Management cautioned that outcomes are uncertain.
- Key risks include dependence on distributor recruitment and productivity, foreign-exchange movements, direct-selling and product regulation, international operations, tax and trade developments, product liability, and cybersecurity and data-protection risks. The company said there were no material changes to the risk factors in its 2018 Form 10-K.
Investor verification priorities
- Check whether sales growth in local currencies translates into sustained reported growth, particularly in Asia and Europe, and whether U.S. distributor recruiting and retention improve.
- Track operating cash flow and working-capital movements after the first-half cash outflow, including the impact of lease payments and cash held abroad.
- Assess whether cost reductions and improved operating margins can be maintained despite restructuring expenses and uneven regional sales.
- Monitor the IRS audit, other tax positions and non-income-tax or litigation exposures, whose final costs may differ from accrued estimates.
- Review the approaching July 2020 credit-facility maturity and covenant compliance; no revolving balance was outstanding at quarter-end.