Nature’s Sunshine Products, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited consolidated results. The company manufactures and sells nutritional and personal-care products primarily through independent consultants.
Financial highlights
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $110.5 million | $102.4 million |
| Gross profit / margin | $76.0 million / 68.8% | $75.4 million / 73.7% |
| Operating income / margin | $1.3 million / 1.2% | $7.6 million / 7.5% |
| Income before taxes | $1.0 million | $5.7 million |
| Net income (loss) | $(2.7) million | $4.2 million |
| Net loss attributable to common shareholders / diluted EPS | $(3.0) million / $(0.15) | $4.0 million / $0.20 |
| Cash from (used in) operations | $(7.9) million | $2.7 million |
- Net sales rose 7.9% year over year, or 10.3% excluding currency effects. Asia grew 29.0%; Europe declined 1.9%, North America declined 4.7%, and Latin America and Other declined 1.2%.
- Cost of sales increased 27.7% to $34.5 million, lifting its share of sales to 31.2% from 26.3%. Gross margin contracted 4.9 percentage points.
- Volume incentives declined to 30.9% of sales from 33.4%. SG&A increased 21.1% to $40.6 million, or 36.8% of sales versus 32.8%.
- The effective tax rate was 369.9%, versus 27.2%. A valuation allowance on deferred tax assets expected to expire before use was the main reason for the tax expense and reported net loss despite pretax income.
- Cash and cash equivalents were $66.5 million at March 31, down from $86.2 million at year-end. Working capital was $80.3 million, versus $88.0 million at year-end. Of cash, $58.0 million was held outside the U.S. and could face restrictions or taxes on repatriation.
- Investing activities used $1.5 million, mainly for capital expenditures. Financing activities used $9.4 million, including $8.0 million for share repurchases. The company repurchased 451,000 shares; $29.6 million remained authorized.
- Total debt was approximately $2.1 million under an equipment financing agreement, including $1.3 million current. The $25 million revolving facility had no balance outstanding; the company reported covenant compliance. The revolver matures July 2023.
Material changes and management commentary
- Operating income fell 82.9% and the company moved from a profit to a net loss, even as sales increased. Management attributed margin pressure to inventory valuation charges, market mix, inflation, and higher raw-material, production, and transportation costs; higher SG&A also weighed on results.
- Inventory-related valuation charges totaled $4.2 million: $3.1 million associated with the Russia-Ukraine conflict and $1.1 million associated with demand forecasts, production issues, and other factors.
- Following Russia’s invasion of Ukraine, the company suspended product shipments to Russia. It recorded a $3.1 million pretax charge, primarily for inventory impairment and contractual obligations. Russia and Other generated $14.5 million in Q1 sales and $1.2 million of operating income before those charges; the company said the conflict is expected to affect business for the foreseeable future.
- Management cited U.S. stockouts and inflation-related customer sensitivity as factors in lower U.S. sales. China’s Q1 sales increased, but renewed COVID-19 restrictions there could affect activity during 2022.
- No numeric full-year earnings or revenue guidance is provided in the supplied filing text. Management said available cash and expected operating cash flows should fund normal operating needs, while acknowledging that economic, geopolitical, demand, tax, and contingency developments could impair liquidity.
Risks, contingencies, and unusual items
- Key risks include the Russia-Ukraine conflict, COVID-19 restrictions and supply-chain disruption, high inflation, foreign-exchange movements, product and direct-selling regulation, consultant retention, and the ability to forecast demand and obtain supplies.
- Potential future payments for non-income-tax contingencies were estimated at $0 to approximately $3.1 million; related accrued liabilities were $0.2 million. Other litigation-related payments were estimated at $0 to approximately $0.5 million, with $0.5 million accrued. Management cautioned that outcomes remain uncertain.
- The company reported no material changes to previously disclosed risk factors other than additional discussion of geopolitical conflict, COVID-19, and inflation. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the $4.2 million inventory valuation charges and related Russia-Ukraine effects recur or expand, and how they affect gross margin and regional operations.
- Whether Asia’s sales growth is sustainable, particularly in China, Japan, and Taiwan, and whether North American stockouts and inflation-related demand weakness improve.
- Whether cash generation recovers after Q1 operating cash outflow, and how much of the $58.0 million held abroad is practically available to fund U.S. needs.
- How deferred-tax-asset valuation allowances, foreign tax-credit uncertainty, and potential tax or legal contingency payments affect future earnings and cash flows.
- Whether continued share repurchases remain consistent with liquidity needs, given the remaining $29.6 million authorization and Q1 cash decline.