Business context and reporting period
Nature’s Sunshine Products, Inc. manufactures and sells nutritional and personal-care products, primarily through independent consultants. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $114.7 million | $100.3 million | $326.1 million | $283.5 million |
| Gross profit / margin | $85.3 million / 74.4% | $73.1 million / 72.9% | $241.3 million / 74.0% | $208.6 million / 73.6% |
| Operating income / margin | $10.0 million / 8.7% | $5.5 million / 5.5% | $27.1 million / 8.3% | $19.2 million / 6.8% |
| Net income | $5.5 million | $7.2 million | $16.4 million | $16.3 million |
| Net income attributable to common shareholders | $4.9 million | $6.8 million | $15.4 million | $15.5 million |
| Diluted EPS | $0.24 | $0.34 | $0.76 | $0.78 |
| Operating cash flow | Not separately reported in the supplied filing text | $20.3 million | $26.8 million |
- Q3 sales rose 14.5% (12.9% excluding currency effects); nine-month sales rose 15.1% (12.3% excluding currency effects). Q3 growth was strongest in Asia (+27.1%) and Europe (+21.1%); North America grew 0.5%.
- At September 30, cash was $75.5 million, versus $92.1 million at December 31, 2020. Working capital was $80.3 million, down from $84.4 million; current assets of $150.7 million and current liabilities of $70.4 million imply a current ratio of about 2.1.
- Cash and cash equivalents included $61.8 million held in foreign markets and $13.7 million in the U.S.; foreign cash may be subject to restrictions or taxes on repatriation.
- Reported note payable was $2.7 million, including $1.2 million current, and related-party notes payable were $0.6 million. The $25 million revolving facility had no outstanding balance; the company reported covenant compliance.
- Inventory increased to $57.4 million from $47.7 million at year-end. Nine-month capital expenditures were $4.6 million.
Material changes versus prior comparable periods
- Q3 gross margin improved to 74.4% from 72.9%, and operating income increased 82.9%. Lower cost of sales and volume incentives as a percentage of sales contributed to operating improvement; SG&A rose 18.7% to $39.5 million.
- Despite higher Q3 operating income, net income fell 23.9% and diluted EPS declined to $0.24 from $0.34. The period included a $0.9 million other loss versus $0.7 million of other income a year earlier, and an income-tax provision of $3.7 million versus a $1.0 million tax benefit.
- For the first nine months, operating income rose 41.0%, but net income attributable to common shareholders was essentially flat. Other loss increased to $2.3 million from $0.2 million, while the tax provision rose to $8.4 million from $2.7 million.
- Nine-month operating cash flow declined to $20.3 million from $26.8 million, primarily due to investment in inventory and the timing of receivable collections. Financing used $29.5 million, mainly reflecting a $19.9 million special dividend, $6.0 million of share repurchases, and debt repayments.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance was provided. Management stated that cash from operations and available cash should fund normal operating needs, including capital expenditures, in the short and long term.
- Management attributed sales growth to increased nutritional-supplement demand, promotions and consultant-engagement initiatives. It also cited higher China service fees and increased selling costs to support growth.
- COVID-19, supply-chain and logistics disruptions, ingredient availability, transportation costs, manufacturing interruptions, and demand-forecasting risk could affect product availability, sales and margins. The duration and financial impact of the pandemic were not estimable.
- Foreign exchange affects sales and results: nine-month results included $2.5 million of foreign-exchange losses in the cash-flow reconciliation, and other loss was primarily related to currency movements. International operations, tax and repatriation constraints are additional exposures.
- The effective tax rate was 40.2% for Q3 and 34.0% for the nine-month period. Management cited transfer-pricing adjustments, nondeductible executive compensation and unfavorable foreign tax items; favorable stock-compensation deductions partly offset these factors.
- The company paid a one-time $1.00-per-share dividend totaling $19.9 million and repurchased 350,000 shares for $6.0 million through September. $9.0 million remained under the $15.0 million repurchase authorization at quarter-end.
- Accrued non-income-tax contingencies were $0.2 million; possible future payments were estimated at $0 to $2.5 million. Other litigation accruals were $0.5 million, with possible future payments estimated at $0 to $0.3 million. Outcomes remain uncertain.
Important facts for investors to verify
- Whether sales growth, particularly in Asia and Europe, is sustainable and continues to translate into operating cash flow.
- Whether elevated inventory and supply-chain costs resolve without shortages, higher expenses or write-downs.
- How foreign-exchange losses, high effective taxes and transfer-pricing matters affect future earnings and cash taxes.
- Availability of foreign-held cash for U.S. needs, and the effects of further dividends or buybacks on liquidity.
- Developments in COVID-19, logistics and consultant activity, along with the ultimate outcomes of tax and legal contingencies.