Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                         .

 

Commission File Number:  0-8707

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

Utah

 

87-0327982

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

2500 West Executive Parkway, Suite 100

Lehi, Utah 84043

(Address of principal executive offices and zip code)

 

(801) 341-7900

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x.

 

The number of shares of Common Stock, no par value, outstanding on October 28, 2013 was 16,207,747 shares.

 

 

 



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended September 30, 2013

 

Table of Contents

 

Part I. Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Comprehensive Income

4

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

33

 

 

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

 

 

Item 1A.

Risk Factors

36

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

36

 

 

 

 

 

Item 4.

Mine Safety Disclosures

36

 

 

 

 

 

Item 5.

Other Information

36

 

 

 

 

 

Item 6.

Exhibits

36

 

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Table of Contents

 

PART I FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

 

 

 

September 30,
2013

 

December 31,
2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

76,623

 

$

79,241

 

Accounts receivable, net of allowance for doubtful accounts of $1,008 and $631, respectively

 

10,908

 

9,614

 

Investments available for sale

 

2,080

 

2,071

 

Inventories

 

43,643

 

43,280

 

Deferred income tax assets

 

5,284

 

5,307

 

Prepaid expenses and other

 

6,864

 

5,820

 

Total current assets

 

145,402

 

145,333

 

 

 

 

 

 

 

Property, plant and equipment, net

 

29,347

 

27,950

 

Investment securities

 

1,109

 

1,276

 

Intangible assets, net

 

891

 

1,002

 

Deferred income tax assets

 

11,487

 

11,516

 

Other assets

 

6,851

 

6,842

 

 

 

$

195,087

 

$

193,919

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

7,209

 

$

6,226

 

Accrued volume incentives

 

20,014

 

18,130

 

Accrued liabilities

 

28,803

 

27,302

 

Deferred revenue

 

3,820

 

4,311

 

Current installments of long-term debt

 

3,110

 

3,350

 

Income taxes payable

 

2,174

 

2,071

 

Total current liabilities

 

65,130

 

61,390

 

 

 

 

 

 

 

Liability related to unrecognized tax benefits

 

11,486

 

10,571

 

Long-term debt

 

10,000

 

2,270

 

Deferred compensation payable

 

1,109

 

1,276

 

Other liabilities

 

2,535

 

2,776

 

Total long-term liabilities

 

25,130

 

16,893

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value, 50,000 shares authorized, 16,208 and 15,810 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively

 

82,246

 

77,292

 

Retained earnings

 

35,879

 

48,910

 

Accumulated other comprehensive loss

 

(13,298

)

(10,566

)

Total shareholders’ equity

 

104,827

 

115,636

 

 

 

$

195,087

 

$

193,919

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net sales revenue

 

$

92,458

 

$

91,232

 

Cost of sales

 

(23,655

)

(23,144

)

Gross profit

 

68,803

 

68,088

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Volume incentives

 

33,920

 

33,155

 

Selling, general and administrative

 

28,170

 

26,228

 

Operating income

 

6,713

 

8,705

 

Other income (expense), net

 

(269

)

(214

)

Income before provision for income taxes

 

6,444

 

8,491

 

Provision for income taxes

 

1,594

 

2,121

 

Net income

 

$

4,850

 

$

6,370

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Net income

 

$

0.30

 

$

0.41

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Net income

 

$

0.29

 

$

0.40

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

16,068

 

15,628

 

Weighted average diluted common shares outstanding

 

16,490

 

15,971

 

 

 

 

 

 

 

Dividends declared per common share

 

$

1.60

 

$

0.05

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net income

 

$

4,850

 

$

6,370

 

Foreign currency translation gain (net of tax)

 

1,128

 

1,416

 

Net unrealized gains on investment securities (net of tax)

 

36

 

20

 

Total comprehensive income

 

$

6,014

 

$

7,806

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net sales revenue

 

$

282,612

 

$

277,091

 

Cost of sales

 

(70,730

)

(69,483

)

Gross profit

 

211,882

 

207,608

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Volume incentives

 

103,420

 

100,276

 

Selling, general and administrative

 

86,996

 

79,142

 

Operating income

 

21,466

 

28,190

 

Other income (expense), net

 

1,543

 

(159

)

Income before provision for income taxes

 

23,009

 

28,031

 

Provision for income taxes

 

7,243

 

7,147

 

Net income

 

15,766

 

20,884

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Net income

 

$

0.99

 

$

1.34

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Net income

 

$

0.97

 

$

1.31

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

15,930

 

15,603

 

Weighted average diluted common shares outstanding

 

16,327

 

15,917

 

 

 

 

 

 

 

Dividends declared per common share

 

$

1.80

 

$

0.10

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net income

 

$

15,766

 

$

20,884

 

Foreign currency translation gain (loss) (net of tax)

 

(2,798

)

1,061

 

Net unrealized gains on investment securities (net of tax)

 

66

 

41

 

Total comprehensive income

 

$

13,034

 

$

21,986

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

15,766

 

$

20,884

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for doubtful accounts

 

322

 

39

 

Depreciation and amortization

 

3,279

 

3,028

 

Share-based compensation expense

 

2,599

 

2,001

 

(Gain) loss on sale of property and equipment

 

(127

)

23

 

Deferred income taxes

 

52

 

(307

)

Amortization of bond discount

 

1

 

3

 

Purchase of trading investment securities

 

(62

)

(60

)

Proceeds from sale of trading investment securities

 

308

 

268

 

Realized and unrealized gains on investments

 

(78

)

(63

)

Foreign exchange (gains) losses

 

(1,057

)

856

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,781

)

(429

)

Inventories

 

(678

)

(1,926

)

Prepaid expenses and other current assets

 

(1,083

)

(1,021

)

Other assets

 

(97

)

(148

)

Accounts payable

 

878

 

(361

)

Accrued volume incentives

 

2,047

 

386

 

Accrued liabilities

 

1,284

 

(1,264

)

Deferred revenue

 

(491

)

403

 

Income taxes payable

 

199

 

(4,222

)

Liability related to unrecognized tax benefits

 

915

 

(654

)

Deferred compensation payable

 

(167

)

(112

)

Net cash provided by operating activities

 

22,029

 

17,324

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property, plant and equipment

 

(4,590

)

(5,617

)

Proceeds from sale of property, plant and equipment

 

233

 

25

 

Proceeds from maturity and sale of investments available for sale

 

100

 

3,689

 

Purchase of investments available for sale

 

(278

)

(197

)

Net cash used in investing activities

 

(4,535

)

(2,100

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Borrowings on revolving credit facility

 

10,000

 

 

Principal payments of long-term debt

 

(2,509

)

(2,465

)

Dividends paid

 

(28,797

)

(1,560

)

Proceeds from the exercise of stock options

 

4,300

 

1,982

 

Repurchase of common stock

 

(1,945

)

 

Net cash used in financing activities

 

(18,951

)

(2,043

)

Effect of exchange rates on cash and cash equivalents

 

(1,161

)

393

 

Net increase (decrease) in cash and cash equivalents

 

(2,618

)

13,574

 

Cash and cash equivalents at the beginning of the period

 

79,241

 

58,969

 

Cash and cash equivalents at the end of the period

 

$

76,623

 

$

72,543

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for income taxes

 

$

7,068

 

$

12,694

 

Cash paid for interest

 

95

 

97

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per-share information)

(Unaudited)

 

(1)                     Basis of Presentation

 

Nature’s Sunshine Products, Inc., together with its subsidiaries (hereinafter referred to collectively as the “Company”), is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. The Company is a Utah corporation with its principal place of business in Lehi, Utah and sells its products to a sales force of independent Managers and Distributors who use the products themselves or resell them to other Distributors or consumers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of the Company’s major product groups are subject to regulation by one or more governmental agencies.

 

The Company markets its products in Australia, Austria, Belarus, Canada, Colombia, Costa Rica, the Czech Republic, Denmark, the Dominican Republic, Ecuador, El Salvador, Finland, Germany, Guatemala, Honduras, Hong Kong, Iceland, Indonesia, Ireland, Japan, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Moldova, Mongolia, the Netherlands, Nicaragua, Norway, Panama, Peru, the Philippines, Poland, Russia, Singapore, Slovenia, South Korea, Spain, Sweden, Taiwan, Thailand, the Ukraine, the United Kingdom, the United States, Venezuela and Vietnam. The Company also exports its products to Argentina, Australia, Chile, Israel, New Zealand and Norway.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial information as of September 30, 2013, and for the three and nine-month periods ended September 30, 2013 and 2012.  The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year ending December 31, 2013.

 

It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Classification of Venezuela as a Highly Inflationary Economy and Devaluation of Its Currency

 

Since January 1, 2010, Venezuela has been designated as a highly inflationary economy. Accordingly, the U.S. dollar became the functional currency for the Company’s subsidiary in Venezuela. All gains and losses resulting from the re-measurement of its financial statements are determined using official rates. On February 11, 2013, the Venezuelan government announced the further devaluation of the bolivar to 6.3 bolivars per U.S. dollar.

 

Currency restrictions enacted by the government of Venezuela require approval from the government’s currency control agency (“CADIVI”) in order for the Company’s subsidiary in Venezuela to obtain U.S. dollars at the official exchange rate to pay for imported products or to repatriate dividends back to the Company. Prior to January 1, 2010, the market rate, which is substantially lower than the official rate, was available to obtain U.S. dollars or other currencies without approval of the CADIVI. In 2013, the CADIVI enacted a new currency transaction system, the Complementary System for Foreign Currency Administration (“SICAD”), to replace the System for Foreign Currency Denominated Securities (“SITME”) which was enacted in 2010 to end the trading of currency at the market rate.  Under SICAD, entities domiciled in Venezuela must formerly apply and be approved by the CADIVI to obtain U.S. dollars or U.S. dollar denominated securities through banking institutions approved by the government. On a daily basis, the CADIVI will determine how many U.S. dollars will be sold and which previously approved companies are authorized to buy. Subsequently, the Venezuela Central Bank will pay the foreign entities directly to limit the amount of U.S. dollars available within Venezuela.

 

The Company re-measures its results in Venezuela at the official SICAD rate, which was approximately 6.3 bolivars per U.S. dollar as of September 30, 2013. However, since the inception of the SICAD system, the Company has been unsuccessful in obtaining

 

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U.S. dollars at the official SICAD exchange rate and it remains uncertain when the Company’s applications will be approved by the CADIVI to complete exchange transactions in the future.

 

During the three months ended September 30, 2013 and 2012, the Company’s Venezuelan subsidiary’s net sales revenue represented approximately 2.2 percent and 1.9 percent of consolidated net sales revenue, respectively.  During the nine months ended September 30, 2013 and 2012, the Company’s Venezuelan subsidiary’s net sales revenue represented approximately 2.1 percent and 1.8 percent of consolidated net sales revenue, respectively.  As of September 30, 2013 and December 31, 2012, the Company’s Venezuelan subsidiary held cash and cash equivalents of $3,515 and $1,748, respectively.  At this time, the Company is not able to reasonably estimate the future state of exchange controls in Venezuela and its availability of U.S. dollars at the official SICAD exchange rate.

 

Classification of Belarus as a Highly Inflationary Economy and Devaluation of Its Currency

 

Since June 30, 2012, Belarus was designated as a highly inflationary economy. The U.S. dollar is the Company’s functional currency for this market. As a result, there were no resulting gains or losses from a re-measurement of the financial statements using official rates of the Company’s Belarusian subsidiary.  However, as a result of the weakening of the Belarusian ruble, the purchasing power of the Company’s Distributors in this market has diminished. During the three months ended September 30, 2013 and 2012, the Company’s Belarusian subsidiary’s net sales revenue represented approximately 2.1 percent and 1.5 percent of consolidated net sales revenue, respectively. During the nine months ended September 30, 2013 and 2012, the Company’s Belarusian subsidiary’s net sales revenue represented approximately 2.1 percent and 1.6 percent of consolidated net sales revenue, respectively.

 

Recent Accounting Pronouncements

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11 Income Taxes (Topic 740): “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. This update provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The amendments in this update are effective for interim and annual periods beginning after December 15, 2013.  The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

(2)                     Inventories

 

Inventories consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

Raw Materials

 

$

11,819

 

$

13,287

 

Work in Progress

 

931

 

742

 

Finished Goods

 

30,893

 

29,251

 

 

 

$

43,643

 

$

43,280

 

 

(3)                     Intangible Assets

 

At September 30, 2013 and December 31, 2012, intangibles for product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $872 and $761, and a net amount of $891 and $1,002, respectively. The estimated useful lives of the product formulations range from 9 to 15 years.

 

Amortization expense for intangible assets for the three months ended September 30, 2013 and 2012 was $37 and $37, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2013 and 2012 was $111 and $111, respectively. Estimated amortization expense for each of the three succeeding fiscal years thereafter is $149 followed by two fiscal years with estimated amortization expense of $91.

 

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(4)                     Investments

 

The amortized cost and estimated fair values of available-for-sale securities by balance sheet classification are as follows:

 

As of September 30, 2013

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

504

 

$

15

 

$

 

$

519

 

U.S. government securities funds

 

997

 

 

(11

)

986

 

Equity securities

 

227

 

351

 

(3

)

575

 

Total short-term investment securities

 

$

1,728

 

$

366

 

$

(14

)

$

2,080

 

 

As of December 31, 2012

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

608

 

$

30

 

$

 

$

638

 

U.S. government securities funds

 

995

 

 

(9

)

986

 

Equity securities

 

227

 

228

 

(8

)

447

 

Total short-term investment securities

 

$

1,830

 

$

258

 

$

(17

)

$

2,071

 

 

The municipal obligations held at a fair value of $519 at September 30, 2013 all mature in less than two years.

 

During the nine-month periods ended September 30, 2013 and 2012, the proceeds from the maturities and sales of available-for-sale securities were $100 and $3,689, respectively. There were no gross realized gains (losses) on sales of available-for-sale securities (net of tax) for the nine-month periods ended September 30, 2013 and 2012, respectively.

 

The Company’s trading securities portfolio totaled $1,109 at September 30, 2013 and $1,276 at December 31, 2012, and generated gains of $45 and $44 for the three months ended September 30, 2013 and 2012, respectively, and generated gains of $78 and $104 for the nine months ended September 30, 2013 and 2012, respectively.

 

As of September 30, 2013 and December 31, 2012, the Company had unrealized losses of $11 and $9, respectively, in its U.S. government securities funds. These losses are due to the interest rate sensitivity of the municipal obligations and the performance of the overall stock market for the equity securities.

 

(5)                     Long-Term Debt

 

On August 9, 2011, the Company entered into a revolving credit agreement with Wells Fargo Bank, N.A. that permits the Company to borrow up to $15,000 through August 9, 2014, bearing interest at LIBOR plus 1.25 percent (1.50 percent as of September 30, 2013). The Company must pay an annual commitment fee of 0.25 percent on the unused portion of the commitment.

 

On August 8, 2013, the Company renegotiated the revolving credit agreement with Wells Fargo Bank, N.A. to increase to the borrowing limit to $25,000 and extend the maturity to September 1, 2015.  At September 30, 2013, the outstanding balance under the revolving credit agreement was $10,000.

 

A term loan of $10,000 was obtained in conjunction with the revolving credit agreement with Wells Fargo Bank, N.A. and has a maturity date of August 9, 2014 and a variable interest rate of LIBOR plus 1.25 percent (1.50 percent as of September 30, 2013 and December 31, 2012). As of September 30, 2013, the outstanding balance under the term loan was $3,110. The term loan is collateralized by the Company’s manufacturing facility in Spanish Fork, Utah.

 

Long-term debt consists of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

Term loan in monthly installments of approximately $284, including interest

 

$

3,110

 

$

5,620

 

Less current installments

 

(3,110

)

(3,350

)

 

 

 

2,270

 

 

 

 

 

 

 

Revolving credit agreement

 

10,000

 

 

 

 

 

 

 

 

Long-term debt less current installments

 

$

10,000

 

$

2,270

 

 

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The various debt agreements contain restrictions on liquidity, leveraging, minimum net income and consecutive quarterly net losses. In addition, the agreements restrict capital expenditures, lease expenditures, other indebtedness, liens on assets, guaranties, loans and advances, and the merger, consolidation and the transfer of assets except in the ordinary course of business. The Company is in compliance with these debt covenants as of September 30, 2013.

 

(6)                     Net Income per Share

 

Basic net income per common share (“Basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share.

 

The following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and nine months ended September 30, 2013 and 2012:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income

 

$

4,850

 

$

6,370

 

$

15,766

 

$

20,884

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

16,068

 

15,628

 

15,930

 

15,603

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.30

 

$

0.41

 

$

0.99

 

$

1.34

 

 

 

 

 

 

 

 

 

 

 

Diluted shares outstanding

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

16,068

 

15,628

 

15,930

 

15,603

 

Weighted average stock options outstanding

 

422

 

343

 

397

 

314

 

Diluted weighted average shares outstanding

 

16,490

 

15,971

 

16,327

 

15,917

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share

 

$

0.29

 

$

0.40

 

$

0.97

 

$

1.31

 

 

 

 

 

 

 

 

 

 

 

Potentially dilutive shares excluded from diluted per share amounts:

 

 

 

 

 

 

 

 

 

Stock options

 

140

 

96

 

140

 

96

 

 

 

 

 

 

 

 

 

 

 

Potentially anti-dilutive shares excluded from diluted per share amounts:

 

 

 

 

 

 

 

 

 

Stock options

 

20

 

167

 

45

 

249

 

 

Potentially dilutive shares excluded from diluted-per-share amounts include performance-based options to purchase shares of common stock for which certain earnings metrics have not been achieved. Potentially anti-dilutive shares excluded from diluted-per-share amounts include both non-qualified stock options and unearned performance-based options to purchase shares of common stock with exercise prices greater than the weighted-average share price during the period and shares that would be anti-dilutive to the computation of diluted net income per share for the three and nine months ended September 30, 2013 and 2012.

 

(7)                     Capital Transactions

 

Dividends

 

The declaration of future dividends is subject to the discretion of the Company’s Board of Directors and will depend upon various factors, including the Company’s earnings, financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by its Board of Directors.

 

On March 6, 2013, the Company’s Board of Directors declared a cash dividend of $0.10 per common share in an aggregate amount of $1,583 that was paid on March 28, 2013 to shareholders of record on March 18, 2013. On May 8, 2013, the Company’s Board of Directors declared a cash dividend of $0.10 per common share in an aggregate amount of $1,587 that was paid on May 30, 2013 to shareholders of record on May 20, 2013.

 

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On August 8, 2013, the Company’s Board of Directors declared a special one-time cash dividend of $1.50 per common share in addition to the Company’s recurring quarterly dividend of $0.10 per common share that was paid on August 29, 2013 to shareholders of record on August 19, 2013. The amount of the cash dividend paid to shareholders was $25,627.

 

Share Repurchase Program

 

On August 8, 2013, the Board of Directors authorized a $10,000 share repurchase program to be implemented over two years. Such purchases may be made in the open market, through block trades, in privately negotiated transactions or otherwise. The timing and amount of any shares repurchased will be determined based on the Company’s evaluation of market conditions and other factors and the program may be discontinued or suspended at any time.

 

The following is a summary of our repurchases of common shares during the three months ended September 30, 2013:

 

Period

 

Number of
Shares

 

Average
Price Paid per Share

 

Program Balance Used
for Repurchases

 

July 1 — September 30, 2013

 

108

 

$

18.06

 

$

1,945

 

 

Share-Based Compensation

 

Stock option activity for the nine months ended September 30, 2013 is as follows:

 

 

 

Number of
Shares

 

Weighted Average
Exercise
Price Per Share

 

Options outstanding at December 31, 2012

 

1,784

 

$

11.81

 

Granted

 

667

 

15.24

 

Forfeited

 

(152

)

13.71

 

Exercised

 

(502

)

8.56

 

Options outstanding at September 30, 2013

 

1,797

 

12.02

 

 

On August 29, 2013, the Company paid a special one-time cash dividend of $1.50 per common share. In accordance with the provisions of the Company’s stock incentive plans, the exercise price of all outstanding stock options on the ex-dividend date were decreased by $1.50 per share in order to prevent a dilution of benefits or potential benefits intended to be made available to the stock option holders. Therefore, no additional share-based compensation expense was recorded.

 

The Company’s outstanding stock options include time-based stock options which vest over differing periods ranging from the date of issuance up to 48 months from the option grant date, performance-based stock options which vest upon achieving operating income margins of six, eight and ten percent as reported in four of five consecutive quarters over the term of the options, performance-based stock options which vest upon achieving cumulative annual net sales revenue growth targets over a rolling two-year period subject to the Company maintaining at least an eight percent operating income margin during the applicable period, and performance-based stock options which vest upon achieving annual net sales targets over a rolling one-year period.

 

During the nine-month period ended September 30, 2013, the Company granted options to purchase 667 shares of common stock under the 2012 Stock Incentive Plan to the Company’s executive officers and other employees, which are composed of both time-based stock options and net sales revenue performance-based stock options. These options were issued with a weighted-average exercise price of $15.24 per share and a weighted-average grant date fair value of $6.27 per share. All of the options issued have an option termination date of ten years from the option grant date.

 

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the nine-month period ended September 30, 2013:

 

 

 

2013

 

Expected life (in years)

 

5.0 to 6.0

 

Risk-free interest rate

 

0.6 to 1.5

 

Expected volatility

 

56.1 to 58.2

 

Dividend yield

 

2.1 to 2.7

 

 

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Expected option lives and volatilities are based on historical data of the Company. The risk free interest rate is calculated as the average U.S. Treasury bill rate that corresponds with the option life.  The dividend yield is based on the Company’s historical and expected amount of dividend payouts, at the time of grant.

 

Share-based compensation expense from time-based stock options for the three-month periods ended September 30, 2013 and 2012 was approximately $620 and $630, respectively, and the related tax benefit was approximately $245 and $246, respectively. Share-based compensation expense from time-based stock options for the nine-month periods ended September 30, 2013 and 2012 was approximately $2,423 and $1,299, respectively and the related tax benefit was approximately $957 and $513, respectively. As of September 30, 2013 and December 31, 2012, the unrecognized share-based compensation expense related to the grants described above was $3,115 and $2,715, respectively. As of September 30, 2013, the remaining compensation expense is expected to be recognized over the weighted-average period of approximately 1.9 years.

 

There was no shared-based compensation expense from operating income performance-based stock options for the three-month periods ended September 30, 2013 and 2012. Shared-based compensation expense from operating income performance-based stock options for the nine-month periods ended September 30, 2013 and 2012 was approximately $0 and $652, respectively, and the related tax benefit was approximately $0 and $255, respectively. As of December 31, 2012, there was no remaining compensation expense to be recognized for the operating income performance-based stock options.

 

The Company has not recognized any share-based compensation expense related to the net sales revenue performance-based stock options for the three and nine months ended September 30, 2013.  Should the Company attain all of the net sales revenue metrics related to the net sales revenue performance-based stock option grants, the Company would recognize up to $900 of potential share-based compensation expense.

 

At September 30, 2013, the aggregate intrinsic value of outstanding time-based and performance-based stock options to purchase 1,797 shares of common stock, exercisable time-based and performance-based stock options to purchase 839 shares of common stock and time-based and performance-based stock options to purchase 777 shares of common stock that are expected to vest (net of expected forfeitures) was $12,565, $7,497 and $4,066, respectively. At December 31, 2012, the aggregate intrinsic value of outstanding options to purchase 1,784 shares of common stock, the exercisable options to purchase 1,011 shares of common stock, and options to purchase 644 shares of common stock expected to vest was $5,315, $5,016 and $281, respectively.

 

Restricted stock unit activity for the nine months ended September 30, 2013 is as follows:

 

 

 

Number of
Shares

 

Weighted Average
Grant Date
Fair Value

 

Units outstanding at December 31, 2012

 

18

 

$

12.07

 

Granted

 

17

 

12.90

 

Issued

 

(3

)

12.07

 

Forfeited

 

 

 

Units outstanding at September 30, 2013

 

32

 

12.47

 

 

On August 29, 2013, the Company paid a special one-time cash dividend of $1.50 per common share. In accordance with the provisions of the Company's stock incentive plans, additional RSUs were awarded based on the closing share price on the ex-dividend date in order to prevent a dilution of benefits or potential benefits intended to be made available to the RSU holders. Therefore, no additional share-based compensation expense was recorded.

 

RSUs are valued at the market value on the date of grant.  Due to post-vesting restrictions, a Finnerty Model was utilized to calculate a valuation discount from the market value of common shares reflecting the restriction embedded in the RSUs preventing the sale of the underlying shares over a certain period of time. The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. This model has gained recognition through its ability to address the magnitude of the discount by considering the volatility of a company’s stock price and the length of restriction. The concept underpinning the Finnerty Model is that restricted stock cannot be sold over a certain period of time.

 

Share-based compensation expense from RSUs for the three months ended September 30, 2013 and 2012, was approximately $49 and $50, respectively, and the related tax benefit was approximately $19 and $20, respectively. Share-based compensation expense from RSUs for the nine months ended September 30, 2013 and 2012, was approximately $176 and $50, respectively, and the related tax benefit was approximately $70 and $20, respectively. As of September 30, 2013 and December 31, 2012, the unrecognized share-based compensation expense related to the grants described above was $108 and $99, respectively. As of September 30, 2013, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 0.7 years.

 

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(8)                     Segment Information

 

The Company has three business segments. These business segments are components of the Company for which separate information is available that is evaluated regularly by the chief executive officer in deciding how to allocate resources and in assessing relative performance.

 

The Company has two business segments that operate under the Nature’s Sunshine Products brand and are divided based on the characteristics of their Distributor base, similarities in compensation plans, as well as the internal organization of NSP’s officers and their responsibilities (NSP Americas, Asia Pacific and Europe; and NSP Russia, Central and Eastern Europe). The Company’s third business segment operates under the Synergy WorldWide brand, which distributes its products through different marketing and Distributor compensation plans and products with formulations that are sufficiently different from those of NSP Americas, Asia Pacific and Europe; and NSP Russia, Central and Eastern Europe to warrant accounting for these operations as a separate business segment. Net sales revenues for each segment have been reduced by intercompany sales as they are not included in the measure of segment profit or loss reviewed by the chief executive officer. The Company evaluates performance based on contribution margin by segment before consideration of certain inter-segment transfers and expenses.

 

During 2012, the Company engaged in a reorganization process in which the business segments, the roles of upper management responsible for operating the business segments, and the information provided to the chief executive officer were reevaluated.  As a result of the reorganization process, the two historical NSP segments (NSP United States and NSP International), which were separated based on their geographical operations, were divided into two new segments (NSP Americas, Asia Pacific and Europe; and NSP Russia, Central and Eastern Europe) based on the nature of their business activities, and the information presented to the chief executive officer. NSP Americas, Asia Pacific and Europe distributes products through a mixture of retailing, practitioners and direct selling while NSP Russia, Central and Eastern Europe is more oriented to a network marketing approach. The new NSP segments conform to a revised internal management structure, and report their operating results separately to the chief executive officer. There was no change to the Synergy WorldWide segment.  The presentation of the comparative information has been revised to conform to the new presentation.

 

Reportable business segment information is as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales revenue:

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe

 

$

50,560

 

$

51,783

 

$

157,113

 

$

159,254

 

NSP Russia, Central and Eastern Europe

 

14,577

 

13,187

 

45,695

 

41,986

 

Synergy WorldWide

 

27,321

 

26,262

 

79,804

 

75,851

 

Total net sales revenue

 

92,458

 

91,232

 

282,612

 

277,091

 

 

 

 

 

 

 

 

 

 

 

Contribution margin (1):

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe

 

19,973

 

20,513

 

64,234

 

63,708

 

NSP Russia, Central and Eastern Europe

 

5,409

 

5,043

 

16,915

 

16,069

 

Synergy WorldWide

 

9,501

 

9,377

 

27,313

 

27,555

 

Total contribution margin

 

34,883

 

34,933

 

108,462

 

107,332

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

28,170

 

26,228

 

86,996

 

79,142

 

Total operating income

 

6,713

 

8,705

 

21,466

 

28,190

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

(269

)

(214

)

1,543

 

(159

)

Income before provision for income taxes

 

$

6,444

 

$

8,491

 

$

23,009

 

$

28,031

 

 


(1)                                           Contribution margin consists of net sales revenue less cost of sales and volume incentives expense.

 

From an individual country perspective, only the United States comprises 10 percent or more of consolidated net sales revenue for the three and nine month periods ended September 30, 2013 and 2012 as follows:

 

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Table of Contents

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales revenue:

 

 

 

 

 

 

 

 

 

United States

 

$

37,209

 

$

38,243

 

$

116,552

 

$

118,390

 

Other

 

55,249

 

52,989

 

166,060

 

158,701

 

 

 

$

92,458

 

$

91,232

 

$

282,612

 

$

277,091

 

 

Revenue generated by each of the Company’s product lines is set forth below:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

29,372

 

$

28,888

 

$

90,757

 

$

89,809

 

Vitamin, mineral and other nutritional supplements

 

19,102

 

20,379

 

59,672

 

61,566

 

Personal care products

 

1,179

 

1,560

 

3,786

 

4,861

 

Other products

 

907

 

956

 

2,898

 

3,018

 

 

 

50,560

 

51,783

 

157,113

 

159,254

 

NSP Russia, Central and Eastern Europe:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

6,656

 

$

5,834

 

$

20,692

 

$

18,389

 

Vitamin, mineral and other nutritional supplements

 

6,854

 

5,954

 

21,337

 

18,686

 

Personal care products

 

1,016

 

1,354

 

3,511

 

4,775

 

Other products

 

51

 

45

 

155

 

136

 

 

 

14,577

 

13,187

 

45,695

 

41,986

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

9,520

 

$

10,005

 

$

31,608

 

$

29,982

 

Vitamin, mineral and other nutritional supplements

 

15,967

 

14,510

 

42,725

 

40,575

 

Personal care products

 

1,471

 

1,394

 

4,405

 

4,020

 

Other products

 

363

 

353

 

1,066

 

1,274

 

 

 

27,321

 

26,262

 

79,804

 

75,851

 

 

 

$

92,458

 

$

91,232

 

$

282,612

 

$

277,091

 

 

From an individual country perspective, only the United States and Venezuela comprise 10 percent or more of consolidated property, plant and equipment as follows:

 

 

 

September 30,
2013

 

December 31,
2012

 

Property, plant and equipment:

 

 

 

 

 

United States

 

$

23,001

 

$

20,923

 

Venezuela

 

3,297

 

3,535

 

Other

 

3,049

 

3,492

 

Total property, plant and equipment

 

$

29,347

 

$

27,950

 

 

(9)                     Income Taxes

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. For the three months ended September 30, 2013 and 2012, the Company’s provision for income taxes, as a percentage of income before income taxes was 24.7 percent and 25.0 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the nine months ended September 30, 2013 and 2012, the Company’s provision for income taxes, as a percentage of income before income taxes was 31.5 percent and 25.5 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2013 was primarily attributed to foreign tax credit benefits (-12.7 percent), net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-17.4 percent), offset by an increase in tax liabilities associated with uncertain tax positions (18.8 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.8 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.2 percent).

 

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Table of Contents

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2013 was primarily attributed to foreign tax credit benefits (-4.3 percent), net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-5.9 percent), offset by an increase in tax liabilities associated with uncertain tax positions (6.4 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.5 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.0 percent).

 

Changes to the effective rate due to dividends received from foreign subsidiaries, impact of foreign tax credits and the unremitted earnings calculation are expected to be recurring; however, depending on various factors, the changes may be favorable or unfavorable in a particular period. The Company’s aggregate consolidated effective tax rate will typically reflect differences between the lower statutory rates in foreign markets compared to the U.S. statutory rate of 35 percent. Given the large number of jurisdictions in which the Company does business and the number of factors that can impact effective tax rates in any given year, the consolidated effective rate is likely to reflect relatively significant fluctuations from year-to-year.

 

The Company’s U.S. federal income tax returns for 2009 through 2012 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2006 through 2012. The Internal Revenue Service (“IRS”) is currently conducting an audit of the Company’s U.S. federal income tax returns for the 2009 through 2011 tax years.

 

As of September 30, 2013, the Company had accrued $11,486 related to unrecognized tax positions compared with $10,571 as of December 31, 2012. This net increase was primarily attributed to the increase in transfer pricing contingencies, including increases in penalties and interest.

 

Although the Company believes its estimates related to its unrecognized tax benefits are reasonable, the Company can provide no assurances that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals.  Any differences in the final tax outcome of these matters could have a material impact on the Company’s income tax provision and operating results in the periods in which the Company makes such determination.

 

(10)             Commitments and Contingencies

 

Legal Proceedings

 

The Company is party to various legal proceedings, including those noted below. Management cannot predict the ultimate outcome of these proceedings, individually or in the aggregate, or their resulting effect on the Company’s business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. The Company maintains product liability, general liability and excess liability insurance coverage. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to the Company, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.

 

Non-income Tax Contingencies

 

The Company has reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. The Company provides provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters, including value added taxes and sales tax. The Company provides provisions for U.S. state sales taxes in each of the states where the Company has nexus. As of September 30, 2013 and December 31, 2012, accrued liabilities include $5,465 and $6,207, respectively, related to non-income tax contingencies. While management believes that the assumptions and estimates used to determine this liability are reasonable, the ultimate outcome of those matters cannot presently be determined. The Company is not able at this time to predict the ultimate outcomes of those matters or to estimate the effect the ultimate outcomes, if greater than the amounts accrued, would have on the financial condition, results of operations or cash flows of the Company.

 

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Table of Contents

 

Other Litigation

 

The Company is party to various other legal proceedings in several foreign jurisdictions related to VAT assessments and other civil litigation.  While there is a reasonable possibility that a material loss may be incurred, either the losses are not considered to be probable or the Company cannot at this time estimate the loss, if any; therefore, no provision for losses has been provided.  The Company believes future payments related to these matters could range from $0 to approximately $900.

 

Government Regulations

 

The Company is subject to governmental regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and to the Company’s direct selling system. The Company is also subject to the jurisdiction of numerous foreign tax and customs authorities. Any assertions or determinations that either the Company or the Company’s Distributors are not in compliance with existing statutes, laws, rules or regulations could potentially have a material adverse effect on the Company’s operations. In addition, in any country or jurisdiction, the adoption of new statutes, laws, rules or regulations, or changes in the interpretation of existing statutes, laws, rules or regulations could have a material adverse effect on the Company and its operations. Although management believes that the Company is in compliance, in all material respects, with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with applicable statutes, laws, rules and regulations will not be challenged by foreign authorities or that such challenges will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

(11)              Fair Value Measurements

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values of each financial instrument. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

The following table presents the Company’s hierarchy for its assets measured at fair value on a recurring basis as of September 30, 2013:

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Total

 

Investments available for sale

 

 

 

 

 

 

 

 

 

Municipal obligations

 

$

 

$

519

 

$

 

$

519

 

U.S. government security funds

 

986

 

 

 

986

 

Equity securities

 

575

 

 

 

575

 

Investment securities

 

1,109

 

 

 

1,109

 

Total assets measured at fair value on a recurring basis

 

$

2,670

 

$

519

 

$

 

$

3,189

 

 

The following table presents the Company’s hierarchy for its assets measured at fair value on a recurring basis as of December 31, 2012:

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Total

 

Investments available for sale

 

 

 

 

 

 

 

 

 

Municipal obligations

 

$

 

$

638

 

$

 

$

638

 

U.S. government security funds

 

986

 

 

 

986

 

Equity securities

 

447

 

 

 

447

 

Investment securities

 

1,276

 

 

 

1,276

 

Total assets measured at fair value on a recurring basis

 

$

2,709

 

$

638

 

$

 

$

3,347

 

 

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Investments available for sale — The majority of the Company’s investment portfolio consist of various securities such as state and municipal obligations, U.S. government security funds, short-term deposits and various equity securities.  The Level 1 securities are valued using quoted prices for identical assets in active markets including equity securities and U.S. government treasuries.  The Level 2 securities include investments in state and municipal obligations whereby all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.

 

Investment securities — The majority of the Company’s trading portfolio consists of various marketable securities that are using quoted prices in active markets.

 

For the nine months ended September 30, 2013 and for the year ended December 31, 2012, there were no fair value measurements using the significant unobservable inputs (Level 3).

 

The carrying amounts reflected on the consolidated balance sheet for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. The carrying amount reflected in the consolidated balance sheet for long-term debt approximates fair value due to the interest rate on the debt being variable based on current market rates. During the three and nine months ended September 30, 2013 and 2012, the Company did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

 

Item 2.                            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this report, as well as the consolidated financial statements, the notes thereto, and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2012, and our Reports on Form 8-K filed since the date of such Form 10-K.

 

Throughout this report, we refer to Nature’s Sunshine Products, Inc., together with its subsidiaries, as “we,” “us,” “our,” “Company” or “the Company.”

 

OVERVIEW

 

Nature’s Sunshine Products, Inc., together with its subsidiaries, is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. The Company is a Utah corporation with its principal place of business in Lehi, Utah, and sells its products to a sales force of independent Managers and Distributors who use the products themselves or resell them to other Distributors or customers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of our major product groups are subject to regulation by one or more governmental agencies.

 

The Company has three business segments that are divided based on the different characteristics of their Distributor bases, marketing and Distributor compensation plans and product formulations, as well as the internal organization of our officers and their responsibilities and business operations.  Two business segments operate under the Nature’s Sunshine Products brand (NSP Americas, Asia Pacific and Europe and NSP Russia, Central and Eastern Europe), and one operates under the Synergy WorldWide brand.

 

We market our products in Australia, Austria, Belarus, Canada, Colombia, Costa Rica, the Czech Republic, Denmark, the Dominican Republic, Ecuador, El Salvador, Finland, Germany, Guatemala, Honduras, Hong Kong, Iceland, Indonesia, Ireland, Japan, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Moldova, Mongolia, the Netherlands, Nicaragua, Norway, Panama, Peru, the Philippines, Poland, Russia, Singapore, Slovenia, South Korea, Spain, Sweden, Taiwan, Thailand, the Ukraine, the United Kingdom, the United States, Venezuela and Vietnam. We export our products to Argentina, Australia, Chile, Israel, New Zealand and Norway.

 

During the third quarter of 2013, we experienced an increase in our consolidated net sales of 1.3 percent compared to the third quarter of 2012 (or 2.4 percent in local currencies). NSP Russia, Central and Eastern Europe net sales increased 10.5 percent compared to the same period in 2012, a fourth consecutive quarter of growth. Synergy WorldWide reported a record quarter with net sales increasing 4.0 percent compared to the same period in 2012 (or 4.6 percent in local currencies). NSP Americas, Asia Pacific and Europe net sales decreased 2.4 percent compared to the same period in 2012 (or 0.7 percent in local currencies). Our most significant sales revenue growth was from our NSP Russia, Central and Eastern Europe businesses in the Ukraine, Russia and Belarus, as well as

 

17



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our Synergy Europe, South Korea and NSP Venezuela markets. Gains in these markets were partially offset by decreases in other markets, principally NSP Japan, NSP United States, Synergy Japan and Synergy North America.

 

Over the same period, selling, general and administrative expenses as a percentage of net sales revenue increased from 28.8 percent in the prior year to 30.4 percent in the current year as a result of the Company’s incremental investment in sales, marketing, science and product development personnel and programs to stimulate sales growth and drive profitability.

 

We distribute our products to consumers through an independent sales force comprised of independent Managers and Distributors, some of whom also consume our products. Typically a person who joins our independent sales force begins as a Distributor. A Distributor may earn Manager status by committing more time and effort to selling our products, recruiting productive Distributors and attaining certain product sales levels. On a worldwide basis, active Managers were approximately 16,900 and 16,900 at September 30, 2013 and 2012, respectively, and active Distributors and customers worldwide were approximately 324,900 and 325,900 at September 30, 2013 and 2012, respectively.

 

Net sales revenue represents net sales including shipping and handling revenues offset by volume rebates given to Managers, Distributors and customers. Volume rebates as a percentage of retail sales may vary by country depending upon regulatory restrictions that limit or otherwise restrict rebates. We also offer reduced volume rebates with respect to certain products and promotions worldwide.

 

Our gross profit consists of net sales less cost of sales, which represents our manufacturing costs, the price we pay to our raw material suppliers and manufacturers of our products, and duties and tariffs, as well as shipping and handling costs related to product shipments and distribution to our Managers, Distributors and customers.

 

Volume incentives are a significant part of our direct sales marketing program, and represent commission payments made to our independent Managers and Distributors. These payments are designed to provide incentives for reaching higher sales levels and for recruiting additional Distributors.  Volume incentives vary slightly, on a percentage basis, by product due to our pricing policies and commission plans in place in our various operations.

 

Selling, general and administrative expenses represent our operating expenses, components of which include labor and benefits, sales events, professional fees, travel and entertainment, Distributor marketing, occupancy costs, communication costs, bank fees, depreciation and amortization, and other miscellaneous operating expenses.

 

Most of our sales to Distributors outside the United States are made in the respective local currencies. In preparing our financial statements, we translate revenues into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate transaction losses on intercompany transactions.

 

Our international operations have provided and are expected to continue to provide a significant portion of our total net sales. As a result, total net sales will continue to be significantly affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we also compare the percentage change in net sales from one period to another period by excluding the effects of foreign currency exchange as shown below. Net sales excluding the impact of foreign exchange fluctuations is not a U.S. GAAP financial measure. Net sales in local currency removes from net sales in U.S. dollars the impact of changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period. We believe presenting the impact of foreign currency fluctuations is useful to investors because it allows a more meaningful comparison of net sales of our foreign operations from period to period. However, net sales excluding the impact of foreign currency fluctuations should not be considered in isolation or as an alternative to net sales in U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. See Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

RESULTS OF OPERATIONS

 

The following table summarizes our unaudited consolidated operating results in U.S. dollars and as a percentage of net sales revenue for the three months ended September 30, 2013 and 2012 (dollar amounts in thousands).

 

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Table of Contents

 

 

 

2013

 

2012

 

Change from
2013 to 2012

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

 

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

Dollar

 

Percentage

 

Net sales revenue

 

$

92,458

 

100.0

%

$

91,232

 

100.0

%

$

1,226

 

1.3

%

Cost of sales

 

(23,655

)

(25.6

)

(23,144

)

(25.4

)

(511

)

(2.2

)

 

 

68,803

 

74.4

 

68,088

 

74.6

 

715

 

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume incentives

 

33,920

 

36.7

 

33,155

 

36.3

 

765

 

2.3

 

SG&A expenses

 

28,170

 

30.4

 

26,228

 

28.8

 

1,942

 

7.4

 

Operating income

 

6,713

 

7.3

 

8,705

 

9.5

 

(1,992

)

(22.9

)

Other income (expense), net

 

(269

)

(0.3

)

(214

)

(0.2

)

(55

)

(25.7

)

Income before provision for income taxes

 

6,444

 

7.0

 

8,491

 

9.3

 

(2,047

)

(24.1

)

Provision for income taxes

 

1,594

 

1.7

 

2,121

 

2.3

 

(527

)

(24.8

)

Net income

 

$

4,850

 

5.3

%

$

6,370

 

7.0

%

$

(1,520

)

(23.9

)%

 

The following table summarizes our unaudited consolidated operating results in U.S. dollars and as a percentage of net sales revenue for the nine months ended September 30, 2013 and 2012 (dollar amounts in thousands).

 

 

 

 

 

 

 

 

 

 

 

Change from

 

 

 

2013

 

2012

 

2013 to 2012

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

 

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

Dollar

 

Percentage

 

Net sales revenue

 

$

282,612

 

100.0

%

$

277,091

 

100.0

%

$

5,521

 

2.0

%

Cost of sales

 

(70,730

)

(25.0

)

(69,483

)

(25.1

)

(1,247

)

(1.8

)

 

 

211,882

 

75.0

 

207,608

 

74.9

 

4,274

 

2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume incentives

 

103,420

 

36.6

 

100,276

 

36.2

 

3,144

 

3.1

 

SG&A expenses

 

86,996

 

30.8

 

79,142

 

28.5

 

7,854

 

9.9

 

Operating income

 

21,466

 

7.6

 

28,190

 

10.2

 

(6,724

)

(23.9

)

Other income (expense), net

 

1,543

 

0.5

 

(159

)

(0.1

)

1,702

 

1,070.4

 

Income before provision for income taxes

 

23,009

 

8.1

 

28,031

 

10.1

 

(5,022

)

(17.9

)

Provision for income taxes

 

7,243

 

2.5

 

7,147

 

2.6

 

96

 

1.3

 

Net income

 

$

15,766

 

5.6

%

$

20,884

 

7.5

%

$

(5,118

)

(24.5

)%

 

Net Sales Revenue

 

The following table summarizes the changes in our net sales revenue by operating segment for the three months ended September 30, 2013 and 2012.

 

 

 

QTD Net Sales Revenue by Operating Segment

 

 

 

2013

 

2012

 

Percent
Change

 

Impact of
Currency
Exchange

 

Percent
Change
Excluding
Impact of
Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

 

 

NSP North America

 

$

36,582

 

$

37,775

 

(3.2

)%

$

(142

)

(2.8

)%

NSP Latin America

 

12,038

 

11,392

 

5.7

 

(491

)

10.0

 

NSP Asia Pacific and Europe

 

1,940

 

2,616

 

(25.8

)

(225

)

(17.2

)

 

 

50,560

 

51,783

 

(2.4

)

(858

)

(0.7

)

 

 

 

 

 

 

 

 

 

 

 

 

NSP Russia, Central and Eastern Europe

 

$

14,577

 

$

13,187

 

10.5

%

$

5

 

10.5

%

 

 

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

 

 

Synergy North America

 

$

4,238

 

$

4,547

 

(6.8

)%

$

 

(6.8

)%

Synergy Asia Pacific

 

15,724

 

15,177

 

3.6

 

(578

)

7.4

 

Synergy Europe

 

7,359

 

6,538

 

12.6

 

433

 

5.9

 

 

 

27,321

 

26,262

 

4.0

 

(145

)

4.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

92,458

 

$

91,232

 

1.3

%

$

(998

)

2.4

%

 

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Table of Contents

 

The following table summarizes the changes in our net sales revenue by operating segment for the nine months ended September 30, 2013 and 2012.

 

 

 

YTD Net Sales Revenue by Operating Segment

 

 

 

2013

 

2012

 

Percent
Change

 

Impact of
Currency
Exchange

 

Percent
Change
Excluding
Impact of
Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

 

 

NSP North America

 

$

115,663

 

$

116,770

 

(0.9

)%

$

(208

)

(0.8

)%

NSP Latin America

 

36,016

 

34,845

 

3.4

 

(830

)

5.7

 

NSP Asia Pacific and Europe

 

5,434

 

7,639

 

(28.9

)

(600

)

(21.0

)

 

 

157,113

 

159,254

 

(1.3

)

(1,638

)

(0.3

)

 

 

 

 

 

 

 

 

 

 

 

 

NSP Russia, Central and Eastern Europe

 

$

45,695

 

$

41,986

 

8.8

%

$

13

 

8.8

%

 

 

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

 

 

Synergy North America

 

$

13,007

 

$

14,336

 

(9.3

)%

$

 

(9.3

)%

Synergy Asia Pacific

 

42,994

 

40,839

 

5.3

 

(938

)

7.6

 

Synergy Europe

 

23,803

 

20,676

 

15.1

 

629

 

12.1

 

 

 

79,804

 

75,851

 

5.2

 

(309

)

5.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

282,612

 

$

277,091

 

2.0

%

$

(1,934

)

2.7

%

 

Consolidated net sales revenue for the three and nine months ended September 30, 2013 was $92.5 million and $282.6 million compared to $91.2 million and $277.1 million for the same periods in 2012, increases of approximately 1.3 percent and 2.0 percent, respectively. We experienced a $1.0 million and $1.9 million unfavorable impact in foreign currency exchange rate fluctuations in the three and nine months ended September 30, 2013, respectively, and our consolidated net sales revenue would have increased by 2.4 percent and 2.7 percent from 2012 excluding the negative impact, respectively. The increase in net sales revenue for the three and nine months ended September 30, 2013 compared to the same periods in 2012 is primarily due to an increase of net sales in our NSP Russia, Central and Eastern Europe and Synergy WorldWide segments and was partially offset by a decline of net sales in our NSP Americas, Asia Pacific and Europe segment.

 

NSP Americas, Asia Pacific and Europe

 

Net sales revenue related to NSP Americas, Asia Pacific and Europe for the three and nine months ended September 30, 2013 was $50.6 million and $157.1 million, respectively, compared to $51.8 million and $159.3 million for the same periods in 2012, or decreases of 2.4 percent and 1.3 percent, respectively, in 2013 compared to 2012. Fluctuations in foreign exchange rates had a $0.9 million and $1.6 million unfavorable impact on net sales for the three and nine months ended September 30, 2013, respectively, and net sales revenue would have decreased by 0.7 percent and 0.3 percent from the same periods in 2012 excluding this negative impact. Active Managers within NSP Americas, Asia Pacific and Europe totaled approximately 8,500 and 8,800 at September 30, 2013 and 2012, respectively. Active Distributors and customers within NSP Americas, Asia Pacific and Europe totaled approximately 153,200 and 159,600 at September 30, 2013 and 2012, respectively. Managers and Distributors within NSP Americas, Asia Pacific and Europe are predominantly practitioners, retailers and consumers of our products. Segment net sales revenue and the number of Distributors and customers decreased primarily due to lower sales in Japan and the United States and were partially offset by increased sales in Mexico and Venezuela. The Active Managers category includes independent Managers under our various compensation plans that have achieved and maintained certain product sales levels. As such, all Managers are considered to be active Managers. The Active Distributors and customers category includes our independent Distributors and customers who have purchased products directly from the Company for resale and/or personal consumption during the previous three months.

 

In the United States, net sales revenues decreased approximately $0.7 million and $0.5 million, or 2.2 percent and 0.5 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. While we continue to see improvement in key sequential business metrics, we have not consistently returned to prior year levels. We continue to stabilize the U.S. business and pursue a return to growth through continued investment in sales and marketing personnel, training, the launch of new products (including the strengthening of our weight management category), sales programs and incentive programs.

 

In Venezuela, net sales revenues increased approximately $0.3 million and $1.1 million, or 18.2 percent and 22.8 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 40.1 percent and 41.1 percent, respectively, compared to the same periods in 2012. Due to Venezuela’s highly inflationary

 

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currency, fluctuations in foreign exchange rates had a $0.4 million and $0.9 million unfavorable impact on net sales for the three and nine months ended September 30, 2013, respectively. The increase in local currency net sales is due to an increased Manager and Distributor base in addition to price increases.

 

In Mexico, net sales revenues increased approximately $0.3 million and $0.4 million, or 11.1 percent and 5.7 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 8.9 percent and 1.2 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.1 and $0.4 million favorable impact on net sales for the three and nine months ended September 30, 2013, respectively. Investment in local sales and marketing initiatives, including hiring a new General Manager for the market who started on April 1, 2013, resulted in a return to growth in net sales revenues in the third quarter of 2013. We have launched a new energy drink and weight management program into the market in September and will continue to invest in the efficiency and effectiveness of our distribution infrastructure.

 

In Japan, net sales revenues decreased approximately $0.9 million and $2.1 million, or 53.1 percent and 46.3 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales decreased 41.0 percent and 34.6 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.2 and $0.5 million unfavorable impact on net sales for the three and nine months ended September 30, 2013, respectively. The decrease in local currency net sales is primarily due to the continued lower activity in our existing Manager and Distributor base, and we continue in our efforts to stabilize the business.

 

NSP Russia, Central and Eastern Europe

 

Net sales revenue related to NSP Russia, Central and Eastern Europe markets (primarily Russia, the Ukraine, and Belarus) for the three and nine months ended September 30, 2013 was $14.6 million and $45.7 million, respectively, compared to $13.2 million and $42.0 million for the same periods in 2012, an increase of 10.5 percent and 8.8 percent, respectively. Fluctuations in foreign exchange rates had a nominally favorable impact on net sales for the three and nine months ended September 30, 2013.  Active Managers within NSP Russia, Central and Eastern Europe totaled approximately 5,200 and 5,000 at September 30, 2013 and 2012, respectively. Active Distributors and customers within NSP Russia, Central and Eastern Europe totaled approximately 119,400 and 112,900 at September 30, 2013 and 2012, respectively. NSP Russia, Central and Eastern Europe’s business model is more oriented to a network marketing approach than that of NSP Americas, Asia Pacific and Europe. Net sales increased year-over-year for the fourth consecutive quarter as a result of improved recruiting, Distributor leadership engagement, Distributor recognition, promotion and training and the enhanced focus afforded by the corporate organizational realignment during 2012. In addition, we launched a new weight management program at our annual regional convention in September.

 

Synergy WorldWide

 

Net sales revenue related to Synergy WorldWide for the three and nine months ended September 30, 2013 was $27.3 million and $79.8 million, respectively, compared to $26.3 million and $75.9 million for the same periods in 2012, an increase of 4.0 percent and 5.2 percent, respectively. Fluctuations in foreign exchange rates had a $0.1 million and $0.3 million unfavorable impact on net sales for the three and nine months ended September 30, 2013, respectively, and net sales revenue would have increased by 4.6 percent and 5.6 percent from 2012 excluding the negative impact, respectively. Active Managers within Synergy WorldWide totaled approximately 3,200 and 3,100 at September 30, 2013 and 2012, respectively. Active Distributors and customers within Synergy WorldWide totaled approximately 52,300 and 53,400 at September 30, 2013 and 2012, respectively. Synergy WorldWide’s business model is operating under a traditional network marketing approach. Synergy WorldWide reported a record quarter for net sales revenue, with the increase primarily due to performance in Europe and South Korea, partially offset by lower net sales in North America. In Japan, negative foreign currency fluctuations of $1.4 million also adversely impacted reported net sales revenue for the nine months ended September 30, 2013.

 

In Europe, net sales revenues increased approximately $0.8 million and $3.1 million, or 12.6 percent and 15.1 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 5.9 percent and 12.1 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.4 and $0.6 million favorable impact on net sales for the three and nine months ended September 30, 2013, respectively. Strong Distributor leadership in recruiting and training efforts continues to effectively build our Distributor base thereby driving increased market penetration, supported by our investment in strengthening our sales and marketing organization across the region.

 

In South Korea, net sales revenues increased approximately $1.7 million and $2.0 million, or an increase of 21.9 percent and 9.3 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 19.1 percent and 6.3 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.2 and $0.6 million favorable impact on net sales for the three and nine months ended September 30, 2013,

 

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respectively. During the second quarter, programs were implemented with the aim of restoring recruiting activity, which had a positive impact in the third quarter. In addition, Distributor activity was stimulated ahead of the Synergy WorldWide global summit, which was held in South Korea in late September, where the SLMsmart weight-management program was launched. This program will be rolled out to other markets around the world throughout 2014.

 

In Japan, net sales revenues decreased approximately $0.4 million and $1.4 million, or 14.7 percent and 18.2 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 6.6 percent and decreased 0.5 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.6 and $1.4 million unfavorable impact on net sales for the three and nine months ended September 30, 2013, respectively. Programs implemented to stimulate activity and growth have begun to yield positive results in the third quarter. However, we will continue to see some fluctuations in our net sales revenue as we reach sustained growth.

 

In North America, net sales revenues decreased approximately $0.3 million and $1.3 million, or 6.8 percent and 9.3 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. The decline in sales is primarily driven by lower Distributor recruiting.  In order to return the market to growth, we have launched new initiatives aimed at increasing leadership involvement and driving Distributor recruitment; these initiatives include the SLMsmart weight-management product line, training meetings and sales promotions.

 

Further information related to NSP Americas, Asia Pacific and Europe, NSP Russia, Central and Eastern Europe, and Synergy WorldWide business segments is set forth in Note 8 to the Unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 of this report.

 

Cost of Sales

 

Cost of sales as a percent of net sales revenue remained relatively stable at 25.6 percent and 25.0 percent for the three and nine months ended September 30, 2013, respectively, compared to 25.4 percent and 25.1 percent for the same periods in 2012.

 

Volume Incentives

 

Volume incentives are a significant part of our direct sales marketing program, and represent commission payments made to our independent Managers and Distributors. These payments are designed to provide incentives for reaching higher product sales levels.  Volume incentives vary slightly, on a percentage basis, by product due to our pricing policies and commission plans in place and the sales mix in our various markets.  Volume incentives as a percent of net sales revenue increased to 36.7 percent and 36.6 percent for the three and nine months ended September 30, 2013, respectively, compared to 36.3 and 36.2 percent for the same periods in 2012. The increases were primarily due to increases in product purchases that pay a higher sales commission in our NSP Russia, Central and Eastern Europe segment.

 

Selling, General and Administrative

 

Selling, general and administrative expenses increased by approximately $1.9 million and $7.9 million to $28.2 million and $87.0 million for the three and nine months ended September 30, 2013, respectively. Selling, general and administrative expenses were 30.4 percent and 30.8 percent of net sales revenue for the three and nine months ended September 30, 2013, respectively, compared to 28.8 percent and 28.5 percent for the same periods in 2012.

 

Significant increases to selling, general and administrative expenses during the three and nine months ended September 30, 2013, compared to the same period in 2012 included:

 

·                  $1.2 and $3.8 million of increased compensation and other benefit costs as a result of the Company’s incremental investment in sales, marketing, science and product development personnel and programs to stimulate sales growth and drive profitability;

·                  $0 and $1.4 million of one-time severance costs and the acceleration of stock option expense incurred related to the resignation of our former Chief Executive Officer;

 

Other Income (Expense), Net

 

Other income (expense), net for the three and nine months ended September 30, 2013 decreased to expense of $0.3 million and increased to income of $1.5 million, respectively, compared to the same periods in 2012. The increase in other income (expense), net for the nine months ended September 30, 2013 was primarily due to increased foreign exchange rate gains on United States Dollar denominated cash balances held in foreign markets.

 

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Income Taxes

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. For the three months ended September 30, 2013 and 2012, the Company’s provision for income taxes, as a percentage of income before income taxes was 24.7 percent and 25.0 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the nine months ended September 30, 2013 and 2012, the Company’s provision for income taxes, as a percentage of income before income taxes was 31.5 percent and 25.5 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2013 was primarily attributed to foreign tax credit benefits (-12.7 percent), net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-17.4 percent), offset by an increase in tax liabilities associated with uncertain tax positions (18.8 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.8 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.2 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2013 was primarily attributed to foreign tax credit benefits (-4.3 percent), net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-5.9 percent), offset by an increase in tax liabilities associated with uncertain tax positions (6.4 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.5 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.0 percent).

 

Changes to the effective rate due to dividends received from foreign subsidiaries, impact of foreign tax credits and the unremitted earnings calculation are expected to be recurring; however, depending on various factors, the changes may be favorable or unfavorable in a particular period. The Company’s aggregate consolidated effective tax rate will typically reflect differences between the lower statutory rates in foreign markets compared to the U.S. statutory rate of 35 percent. Given the large number of jurisdictions in which the Company does business and the number of factors that can impact effective tax rates in any given year, the consolidated effective rate is likely to reflect relatively significant fluctuations from year-to-year.

 

The Company’s U.S. federal income tax returns for 2009 through 2012 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2006 through 2012. The Internal Revenue Service (“IRS”) is currently conducting an audit of the Company’s U.S. federal income tax returns for the 2009 through 2011 tax years.

 

As of September 30, 2013, the Company had accrued $11,486 related to unrecognized tax positions compared with $10,571 as of December 31, 2012. This net increase was primarily attributed to the increase in transfer pricing contingencies, including increases in penalties and interest.

 

Although the Company believes its estimates related to its unrecognized tax benefits are reasonable, the Company can provide no assurances that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals.  Any differences in the final tax outcome of these matters could have a material impact on the Company’s income tax provision and operating results in the periods in which the Company makes such determination.

 

Product Categories

 

Our line of over 700 products includes herbal products, vitamins, mineral and other nutritional supplements, personal care products and other complementary products such as homeopathic products and sales aids. We purchase herbs and other raw materials in bulk and, after quality control testing, we formulate, encapsulate, tablet or concentrate them, and package them for shipment. Most of our products are manufactured at our facility in Spanish Fork, Utah. Contract manufacturers produce some of our vitamins, mineral and other nutritional supplements, personal care products and certain other miscellaneous products in accordance with our

 

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specifications and standards. We have implemented stringent quality control procedures to verify that our contract manufacturers have complied with our specifications and standards.

 

Presented below are the U.S. dollar amounts and associated revenue percentages from the sale of herbal products, vitamins, mineral and other nutritional supplements, personal care products, and other complementary products for the three and nine months ended September 30, 2013 and 2012, by business segment (in thousands).

 

 

 

Three Months Ended
September 30,

 

 

 

2013

 

2012

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

29,372

 

58.1

%

$

28,888

 

55.8

%

Vitamin, mineral and other nutritional supplements

 

19,102

 

37.8

 

20,379

 

39.4

 

Personal care products

 

1,179

 

2.3

 

1,560

 

3.0

 

Other products

 

907

 

1.8

 

956

 

1.8

 

 

 

50,560

 

100.0

%

51,783

 

100.0

%

 

 

 

 

 

 

 

 

 

 

NSP Russia, Central and Eastern Europe:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

6,656

 

45.7

%

$

5,834

 

44.2

%

Vitamin, mineral and other nutritional supplements

 

6,854

 

47.0

 

5,954

 

45.2

 

Personal care products

 

1,016

 

7.0

 

1,354

 

10.3

 

Other products

 

51

 

0.3

 

45

 

0.3

 

 

 

14,577

 

100.0

%

13,187

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

9,520

 

34.9

%

$

10,005

 

38.1

%

Vitamin, mineral and other nutritional supplements

 

15,967

 

58.4

 

14,510

 

55.3

 

Personal care products

 

1,471

 

5.4

 

1,394

 

5.3

 

Other products

 

363

 

1.3

 

353

 

1.3

 

 

 

27,321

 

100.0

%

26,262

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Consolidated:

 

 

 

 

 

 

 

 

 

Herbal Products

 

$

45,548

 

49.3

%

$

44,727

 

49.0

%

Vitamin, Mineral and Other Nutritional Supplements

 

41,923

 

45.3

 

40,843

 

44.8

 

Personal Care Products

 

3,666

 

4.0

 

4,308

 

4.7