Business context and reporting period
Nature’s Sunshine Products, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. The company manufactures and sells nutritional and personal-care products, primarily through independent distributors, across Asia, Europe, North America, and Latin America and Other.
In the second quarter of 2019, the company reorganized its reporting segments around geographic regions across both its Nature’s Sunshine and Synergy brands; 2018 comparative segment data was recast. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $362.2 million | $364.8 million |
| Gross profit / margin | $268.3 million / 74.1% | $269.1 million / 73.8% |
| Operating income / margin | $16.1 million / 4.5% | $5.4 million / 1.5% |
| Net income (loss) | $6.9 million | ($1.2 million) |
| Net income (loss) attributable to common shareholders | $6.8 million; diluted EPS $0.34 | ($0.9 million); diluted EPS ($0.04) |
| Cash from operating activities | $8.5 million | $21.8 million |
| Capital expenditures | $5.1 million | $4.8 million |
- Gross margin improved 0.3 percentage points; operating margin rose 3.0 points. SG&A fell $9.7 million to $128.7 million, or 35.5% of sales, partly reflecting headcount and other cost reductions. Cost of sales and volume incentives also declined as a share of sales.
- Sales decreased 0.7% in reported dollars but increased 1.2% excluding currency effects. Foreign exchange reduced sales by approximately $7.0 million.
- By segment, sales were Asia $138.5 million (down 0.4% reported; up 3.3% in local currency), Europe $62.5 million (up 11.0%), North America $138.2 million (down 4.2%), and Latin America and Other $23.0 million (down 8.8%).
- Cash and cash equivalents were $53.6 million, including $34.3 million held by foreign subsidiaries and potentially subject to repatriation restrictions or withholding taxes. Working capital was $54.8 million, versus $40.1 million a year earlier.
- No balance was outstanding on the $25 million revolving credit facility at year-end; the company reported covenant compliance. The facility was scheduled to mature July 11, 2020. Operating lease liabilities totaled $25.2 million; undiscounted lease commitments were $29.3 million.
- Operating cash flow declined $13.3 million, principally due to timing of payments and changes in accrued liabilities, payables, inventory, taxes, and distributor incentives and service fees. Management said available cash and operating cash generation should fund normal operating needs, while noting economic, demand, tax, and contingency risks.
Material changes versus the prior comparable period
- Revenue was broadly stable in local currencies, but reported sales declined amid adverse foreign-exchange movements. Europe grew, while North America and Latin America and Other contracted.
- Operating income more than doubled as SG&A decreased and gross margin improved. FY 2018 included $2.4 million of CEO transition costs and $4.0 million of gains from real-estate sales; 2019 included $2.4 million of restructuring-related severance costs.
- The effective tax rate fell to 55.7% from 137.6%, but remained high, reflecting foreign-operation tax effects, valuation allowances, and other international tax items.
- Active distributors and customers increased to approximately 242,700 from 224,900, and active Managers increased to 13,200 from 12,600. The filing says U.S. sales fell mainly because of weaker distributor recruiting and retention; Latin America and Other declines reflected lower retention and average purchase size.
- Operating cash flow was lower than in 2018, which included $5.0 million of proceeds from property sales in investing activities. Cash increased to $53.6 million from $50.6 million.
Outlook, risks, contingencies, and unusual items
- The filing gives no quantified FY 2020 revenue or earnings guidance. Management warned that the coronavirus outbreak could materially affect the Asia segment and consolidated first-quarter and full-year 2020 results; the duration and financial impact could not be estimated.
- Material risk areas include direct-selling and distributor-compensation regulation, product and advertising rules, distributor retention and concentration, China regulations and the Fosun joint venture, foreign-exchange movements, cybersecurity and privacy, and changing CBD laws. The FDA’s stated position at filing time was that CBD was not lawful in food and dietary supplements, while it evaluated a regulatory approach.
- The company reported $2.0 million of litigation-settlement payments during 2019. It had accrued $0.4 million for certain other proceedings; possible future payments on those matters were estimated at $0–$0.4 million. Non-income-tax contingencies were accrued at $0.4 million, with possible future payments estimated at $0–$3.4 million. Outcomes remain uncertain.
- Adoption of lease accounting Topic 842 in 2019 added right-of-use assets and lease liabilities; the company said adoption did not materially affect earnings or cash flows. The independent auditor gave an unqualified opinion on the financial statements and internal controls over financial reporting.
Important facts for investors to verify
- Whether 2020 results were materially affected by the coronavirus outbreak, particularly in China and the broader Asia region.
- Whether U.S. recruiting and retention improve and whether the growth in active distributor/customer counts translates into sustained sales.
- Whether revenue trends in North America and Latin America and Other stabilize, and whether Europe’s growth continues.
- How foreign exchange, international tax items, and the high effective tax rate affect future reported earnings and cash generation.
- Current status and terms of the revolving credit facility after its stated July 2020 maturity, and the accessibility of cash held in foreign markets.
- Developments in direct-selling, product, CBD, privacy, tax, and litigation matters, including any changes to the disclosed contingency estimates.