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 June 30, 2014

 

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: 001-34483

 

 

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 July 25, 2014, was 16,202,840 shares.

 

 

 


 


Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended June 30, 2014

 

Table of Contents

 

Part I. Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

Condensed Consolidated Statements of Operations

5

 

 

Condensed Consolidated Statements of Comprehensive Income

5

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

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

19

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

 

 

Item 1A.

Risk Factors

38

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

 

 

Item 3.

Default Upon Senior Securities

39

 

 

 

 

 

Item 4.

Mine Safety Disclosures

39

 

 

 

 

 

Item 5.

Other Information

39

 

 

 

 

 

Item 6.

Exhibits

39

 

2


 


Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information included or incorporated herein by reference in this report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. For example, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are more fully described in this report, including the risks set forth under “Risk Factors” in Item 1A, is included from time to time in our reports filed with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2013, as well as our quarterly reports on Form 10-Q, particularly under the captions “Forward-Looking Statements” and “Risk Factors.” but include the following:

 

·             any negative consequences resulting from the economy, including the availability of liquidity to us, our Distributors and our suppliers or the willingness of our customers to purchase products;

·             our relationship with, and our ability to influence the actions of, our Distributors, and other third parties with whom we do business;

·             improper action by our employees or Distributors;

·             negative publicity related to our products or direct selling organization;

·             changing consumer preferences and demands;

·             our reliance upon, or the loss or departure of any member of, our senior management team which could negatively impact our Distributor relations and operating results;

·             the competitive nature of our business;

·             regulatory matters governing our products, our direct selling program, or the direct selling market in which we operate;

·             legal challenges to our direct selling program;

·             risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation, disruptions or conflicts with our third party importers, pricing and currency devaluation risks, especially in countries such as Venezuela, Ukraine, Russia and Belarus;

·             uncertainties relating to the application of transfer pricing, duties, value-added taxes, and other tax regulations, and changes thereto;

·             our dependence on increased penetration of existing markets;

·             our reliance on our information technology infrastructure;

·             the sufficiency of trademarks and other intellectual property rights;

·             changes in tax laws, treaties or regulations, or their interpretation;

·             taxation relating to our Distributors;

·             product liability claims; and

·             share price volatility related to, among other things, speculative trading.

 

All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report.  Throughout this report, we refer to Nature’s Sunshine Products, Inc., together with its subsidiaries, as “we,” “us,” “our Company” or “the Company.”

 

3


 


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)

 

 

 

June 30,
2014

 

December 31,
2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

68,555

 

$

77,247

 

Accounts receivable, net of allowance for doubtful accounts of $663 and $1,087, respectively

 

9,010

 

10,206

 

Investments available for sale

 

2,024

 

2,006

 

Inventories

 

40,477

 

41,910

 

Deferred income tax assets

 

5,596

 

5,711

 

Income tax receivable

 

8,447

 

6,665

 

Prepaid expenses and other

 

5,330

 

4,849

 

Total current assets

 

139,439

 

148,594

 

 

 

 

 

 

 

Property, plant and equipment, net

 

41,066

 

32,022

 

Investment securities

 

1,022

 

971

 

Intangible assets, net

 

779

 

853

 

Deferred income tax assets

 

13,930

 

9,928

 

Other assets

 

8,943

 

7,244

 

 

 

$

205,179

 

$

199,612

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,800

 

$

5,664

 

Accrued volume incentives

 

19,322

 

19,206

 

Accrued liabilities

 

29,087

 

34,893

 

Deferred revenue

 

3,745

 

4,173

 

Current installments of long-term debt and revolving credit facility

 

572

 

2,267

 

Income taxes payable

 

1,575

 

2,366

 

Total current liabilities

 

60,101

 

68,569

 

 

 

 

 

 

 

Liability related to unrecognized tax benefits

 

13,223

 

12,402

 

Long-term debt and revolving credit facility

 

10,000

 

10,000

 

Deferred compensation payable

 

1,022

 

971

 

Other liabilities

 

2,638

 

2,411

 

 

 

86,984

 

94,353

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value, 50,000 shares authorized, 16,203 and 16,179 shares issued and outstanding as of June 30, 2014, and December 31, 2013, respectively

 

85,414

 

83,122

 

Retained earnings

 

45,762

 

36,100

 

Accumulated other comprehensive loss

 

(12,981

)

(13,963

)

Total shareholders’ equity

 

118,195

 

105,259

 

 

 

$

205,179

 

$

199,612

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net sales revenue

 

$

94,325

 

$

93,675

 

Cost of sales

 

(23,372

)

(22,630

)

Gross profit

 

70,953

 

71,045

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Volume incentives

 

34,834

 

34,525

 

Selling, general and administrative

 

30,305

 

28,709

 

Operating income

 

5,814

 

7,811

 

Other income (loss), net

 

(378

)

1,482

 

Income before provision for income taxes

 

5,436

 

9,293

 

Provision for income taxes

 

2,202

 

3,241

 

Net income

 

$

3,234

 

$

6,052

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Net income

 

$

0.20

 

$

0.38

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Net income

 

$

0.20

 

$

0.38

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

16,187

 

15,896

 

Weighted average diluted common shares outstanding

 

16,224

 

16,112

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.10

 

$

0.10

 

 

See accompanying notes to condensed consolidated financial statements.

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net income

 

$

3,234

 

$

6,052

 

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

 

793

 

(2,040

)

Net unrealized gains on investment securities (net of tax)

 

8

 

6

 

Total comprehensive income

 

$

4,035

 

$

4,018

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net sales revenue

 

$

190,078

 

$

190,154

 

Cost of sales

 

(46,478

)

(47,075

)

Gross profit

 

143,600

 

143,079

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Volume incentives

 

70,551

 

69,500

 

Selling, general and administrative

 

60,063

 

58,826

 

Operating income

 

12,986

 

14,753

 

Other income (loss), net

 

(1,493

)

1,812

 

Income before provision for income taxes

 

11,493

 

16,565

 

Provision (benefit) for income taxes

 

(1,406

)

5,649

 

Net income

 

$

12,899

 

$

10,916

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Net income

 

$

0.80

 

$

0.69

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Net income

 

$

0.79

 

$

0.68

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

16,183

 

15,860

 

Weighted average diluted common shares outstanding

 

16,392

 

16,079

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.20

 

$

0.20

 

 

See accompanying notes to condensed consolidated financial statements.

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net income

 

$

12,899

 

$

10,916

 

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

 

971

 

(3,926

)

Net unrealized gains on investment securities (net of tax)

 

11

 

30

 

Total comprehensive income

 

$

13,881

 

$

7,020

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

12,899

 

$

10,916

 

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

 

 

 

 

 

Provision for doubtful accounts

 

110

 

19

 

Depreciation and amortization

 

2,375

 

2,181

 

Share-based compensation expense

 

2,082

 

1,930

 

Loss on sale of property and equipment

 

19

 

25

 

Deferred income taxes

 

(3,887

)

183

 

Amortization of bond discount

 

1

 

1

 

Purchase of trading investment securities

 

(98

)

(36

)

Proceeds from sale of trading investment securities

 

93

 

193

 

Realized and unrealized gains on investments

 

(44

)

(33

)

Foreign exchange losses (gains)

 

1,390

 

(1,583

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

1,165

 

229

 

Inventories

 

1,384

 

1,163

 

Prepaid expenses and other current assets

 

(2,331

)

(642

)

Other assets

 

(1,467

)

103

 

Accounts payable

 

410

 

(1,296

)

Accrued volume incentives

 

19

 

1,643

 

Accrued liabilities

 

(5,568

)

699

 

Deferred revenue

 

(428

)

(901

)

Income taxes payable

 

(858

)

401

 

Liability related to unrecognized tax benefits

 

821

 

216

 

Deferred compensation payable

 

51

 

(125

)

Net cash provided by operating activities

 

8,138

 

15,286

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property, plant and equipment

 

(11,568

)

(2,332

)

Proceeds from sale of property, plant and equipment

 

3

 

46

 

Purchase of investments available for sale

 

(18

)

(75

)

Proceeds from investments available for sale

 

51

 

 

Net cash used in investing activities

 

(11,532

)

(2,361

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Payments of cash dividends

 

(3,237

)

(3,170

)

Principal payments of long-term debt and revolving credit facility

 

(1,695

)

(1,391

)

Proceeds from the exercise of stock options

 

210

 

1,356

 

Net cash used in financing activities

 

(4,722

)

(3,205

)

Effect of exchange rates on cash and cash equivalents

 

(576

)

(1,666

)

Net increase (decrease) in cash and cash equivalents

 

(8,692

)

8,054

 

Cash and cash equivalents at the beginning of the period

 

77,247

 

79,241

 

Cash and cash equivalents at the end of the period

 

$

68,555

 

$

87,295

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for income taxes

 

$

4,062

 

$

5,407

 

Cash paid for interest

 

106

 

32

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

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 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, Italy, 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, Ukraine, the United Kingdom, the United States, Venezuela and Vietnam. The Company also exports its products to Argentina, Australia, Chile, Israel, New Zealand, Norway, and the United Kingdom.

 

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 June 30, 2014, and for the three- and six-month periods ended June 30, 2014 and 2013.  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, 2014.

 

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, 2013.

 

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. On February 11, 2013, the Venezuelan government’s currency control agency (“CADIVI”), announced the further devaluation of the bolivar to 6.3 bolivars per U.S. dollar. In addition, the CADIVI enacted a new currency exchange mechanism, the First Complementary System for Foreign Currency Administration (“SICAD 1”), and mandated foreign entities domiciled in Venezuela to formally apply and be approved by the CADIVI to obtain U.S. dollars through banking institutions approved by the Venezuelan government at the official CADIVI exchange rate of 6.3 bolivars per U.S. dollar or at the official SICAD 1 exchange rate of 11.3 bolivars per U.S. dollar. On a weekly basis, the CADIVI determined how many U.S. dollars would be sold and which previously approved companies would be authorized to obtain them. Companies were approved to obtain U.S. dollars based on the individual products that they imported and sold in Venezuela. Products that are considered to be more beneficial to consumers in Venezuela, such as medicinal products, were approved for payment at the official CADIVI exchange rate of 6.3, while other beneficial products, such as dietary supplements, were approved for payment at the official SICAD 1 exchange rate of 11.3.   Foreign entities domiciled in Venezuela pay bolivars to the Venezuela Central Bank, which then pays U.S. dollars directly to the foreign entities to limit the amount of U.S. dollars available within Venezuela. The Company is currently in the process of registering its products in order to obtain U.S. dollars at the official CADAVI exchange rate of 6.3 or the official SICAD 1 exchange rate of 11.3. The Company has not successfully obtained U.S. dollars at the CADIVI exchange rate since the establishment of the SICAD 1 currency exchange mechanism.

 

Effective January 24, 2014, additional changes to the country’s foreign exchange system were enacted by the Venezuelan government that expanded the types of products that could be subject to the weekly SICAD 1 auction process. In addition, a new currency control agency (“CENCOEX”) was established to replace the CADIVI. The CENCOEX official exchange rate was

 

8



Table of Contents

 

maintained at the CADIVI official exchange rate 6.3 bolivars per U.S. dollar. The CENCOEX also enacted a new currency exchange mechanism, the Second Complementary System for Foreign Currency Administration (“SICAD 2”) that will supplement and coexist with the SICAD 1 currency exchange mechanism. The SICAD 2 is expected to provide a greater supply of U.S. dollars from sources other than the Venezuelan government and to allow all sectors and companies to participate. The SICAD 2 is intended to more closely resemble a market-driven exchange rate than the official CENCOEX and SICAD 1 exchange rates of 6.3 and 11.3, respectively. As of June 30, 2014, the SICAD 2 exchange rate was approximately 50.0 bolivars per U.S. dollar.

 

The Company does not intend to apply for exchange or register any products at the SICAD 2 exchange rate. The Company is currently monitoring the currency exchange mechanisms in place and the potential for currency exchange transactions should the Company’s applications for currency exchange be unsuccessful. At this time, the Company is uncertain of the process or exchange rate for obtaining U.S. dollars for previously shipped products dating back to the establishment of the SICAD 1 currency exchange mechanism in February 2013.

 

Due to these circumstances, the Company has re-measured its assets and liabilities in Venezuela at the official SICAD 1 exchange rate of 11.3, effective March 31, 2014. This re-measurement resulted in a foreign exchange loss of $845. Going forward the Company will report its results at the higher official exchange rate of 11.3 bolivars to the U.S. dollar.

 

During the three months ended June 30, 2014 and 2013, the Company’s Venezuelan subsidiary’s net sales revenue represented approximately 1.6 percent and 2.0 percent of consolidated net sales revenue, respectively.  During the six months ended June 30, 2014 and 2013, the Company’s Venezuelan subsidiary’s net sales revenue represented approximately 2.0 percent and 2.1 percent of consolidated net sales revenue, respectively.  As of June 30, 2014 and December 31, 2013, the Company’s Venezuelan subsidiary held cash and cash equivalents of $2,906 and $3,922, respectively. As of June 30, 2014 and December 31, 2013, the Company’s Venezuelan subsidiary held net assets of $4,884 and $5,721, respectively, of which was property, plant and equipment of $3,016 and $3,207, respectively.

 

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

 

Since June 30, 2012, Belarus has been 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 June 30, 2014 and 2013, the Company’s Belarusian subsidiary’s net sales revenue represented approximately 2.3 percent and 1.9 percent of consolidated net sales revenue, respectively. During the six months ended June 30, 2014 and 2013, the Company’s Belarusian subsidiary’s net sales revenue represented approximately 2.4 percent and 2.1 percent of consolidated net sales revenue, respectively.

 

Strategic Alliance with Fosun Pharma

 

On June 26, 2014, the Company and Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“Fosun Pharma”), a leading healthcare company in the People’s Republic of China (“China”), announced the signing of definitive agreements with respect to the formation of a China joint venture to market and distribute Nature’s Sunshine and Synergy products in China and a concurrent investment by Fosun Pharma of approximately $46,300 in Nature’s Sunshine common stock to be issued pursuant to a private placement transaction. Nature’s Sunshine intends to use the net proceeds of the private placement transaction to fund its share of the China joint venture and pay a cash dividend of $1.50 per share contingent upon transaction closing.  The amount of the cash dividend paid to shareholders is expected to be approximately $29,000. The parties anticipate closing the joint venture and private placement transaction in the third quarter of 2014, subject to customary closing conditions including the receipt of required regulatory approvals.

 

Nature’s Sunshine and Fosun Pharma have agreed to enter into a joint venture in China which will be owned 80 percent by Nature’s Sunshine and 20 percent by a wholly-owned subsidiary of Fosun Pharma. The joint venture will be capitalized initially with $16,000 from Nature’s Sunshine and $4,000 from Fosun Pharma.  The launch of the joint venture is subject to customary conditions, including regulatory approvals by the Chinese government. The Company will consolidate the joint venture in its consolidated financial statements, with the 20 percent Fosun Pharma interest presented as a noncontrolling interest.

 

The joint venture, known as Nature’s Sunshine Hong Kong Limited, expects to market and distribute Nature’s Sunshine products in China.  Nature’s Sunshine Hong Kong Limited currently anticipates deploying a multi-brand, multi-channel go-to-market strategy that offers select Nature’s Sunshine-branded products through certain of Fosun Pharma’s existing retail locations across China, and select Synergy-branded products through a direct selling model.  The time to market will be dependent upon regulatory processes, including product registration, permit and license approvals.

 

Pursuant to a concurrent private placement transaction, Nature’s Sunshine has agreed to issue approximately 2,860 shares of unregistered common stock to Fosun Pharma at a price of $16.19 per share, representing aggregate proceeds to Nature’s Sunshine of

 

9



Table of Contents

 

approximately $46,300. The purchase price represents a 10 percent premium to Nature’s Sunshine’s average stock price over the trailing 30 business day period as of June 26, 2014.  Upon the closing of the sale, Fosun Pharma will own approximately 15% of Nature’s Sunshine outstanding common shares. Nature’s Sunshine has granted Fosun Pharma certain registration rights with respect to the private placement shares.  In addition, Nature’s Sunshine has agreed to initially appoint one director designated by Fosun Pharma to its board of directors.  The issuance and sale of the shares is subject to customary closing conditions, including the consummation of the joint venture transaction and is expected to close concurrently with the joint venture transaction.

 

Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08 Presentation of Financial Statements (Topic 740) and Property, Plant, and Equipment (Topic 360): “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. This update changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in this update are effective for interim and annual periods beginning after December 15, 2014.  The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 Revenue from Contracts with Customers (Topic 606). This update requires an entity to recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. As such, this update affects an entity that either enters into contracts with customers or transfers goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This update will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606. The amendments in this update are effective for interim and annual periods beginning after December 15, 2015.  The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12 Compensation — Stock Compensation (Topic 718): “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this update are effective for interim and annual periods beginning after December 15, 2015.  The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

(2)                     Inventories

 

The composition of inventories is as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Raw materials

 

$

11,887

 

$

10,848

 

Work in progress

 

800

 

740

 

Finished goods

 

27,790

 

30,322

 

Total inventory

 

$

40,477

 

$

41,910

 

 

(3)                     Intangible Assets

 

At June 30, 2014, and December 31, 2013, intangibles for product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $984 and $910, and a net amount of $779 and $853, respectively. The estimated useful lives of the product formulations range from 9 to 15 years.

 

10



Table of Contents

 

Amortization expense for intangible assets for the three months ended June 30, 2014 and 2013, was $37 and $37, respectively. Amortization expense for intangible assets for the six months ended June 30, 2014 and 2013 was $74 and $74, respectively.  Estimated amortization expense for the next succeeding fiscal year thereafter is $149 followed by four fiscal years with estimated amortization expense of $91.

 

(4)                     Investments

 

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

 

As of June 30, 2014

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

401

 

$

5

 

$

 

$

406

 

U.S. government securities funds

 

998

 

 

(11

)

987

 

Equity securities

 

227

 

412

 

(8

)

631

 

Total short-term investment securities

 

$

1,626

 

$

417

 

$

(19

)

$

2,024

 

 

As of December 31, 2013

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

403

 

$

12

 

$

 

$

415

 

U.S. government securities funds

 

997

 

 

(14

)

983

 

Equity securities

 

227

 

386

 

(5

)

608

 

Total short-term investment securities

 

$

1,627

 

$

398

 

$

(19

)

$

2,006

 

 

The municipal obligations held at a fair value of $406 at June 30, 2014, all mature in less than two years.

 

During the six-month periods ended June 30, 2014 and 2013, the proceeds from the sales of available-for-sale securities were $51 and $0, respectively. There were no gross realized gains (losses) on sales of available-for-sale securities (net of tax) for the six-month periods ended June 30, 2014 and 2013, respectively.

 

The Company’s trading securities portfolio totaled $1,022 at June 30, 2014, and $971 at December 31, 2013, and generated gains of $44 and $33 for the six months ended June 30, 2014 and 2013.

 

As of June 30, 2014 and December 31, 2013, the Company had unrealized losses of $11 and $14, 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

 

The Company’s revolving credit agreement with Wells Fargo Bank, N.A., permits the Company to borrow up to $25,000 through August 9, 2014, bearing interest at LIBOR plus 1.25 percent (1.50 percent as of June 30, 2014 and December 31, 2013). The Company must pay an annual commitment fee of 0.25 percent on the unused portion of the commitment. Currently, the revolving credit agreement matures on September 1, 2015.  At June 30, 2014 and December 31, 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 each of June 30, 2014 and December 31, 2013). The outstanding balance under the term loan was $572 and $2,267 as of June 30, 2014 and December 31, 2013, respectively. The term loan is collateralized by the Company’s manufacturing facility in Spanish Fork, Utah.

 

The various debt agreements contain restrictions on liquidity, leverage, 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 June 30, 2014.

 

11



Table of Contents

 

(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.

 

Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and six months ended June 30, 2014 and 2013:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net income

 

$

3,234

 

$

6,052

 

$

12,899

 

$

10,916

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

16,187

 

15,896

 

16,183

 

15,860

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.20

 

$

0.38

 

$

0.80

 

$

0.69

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

16,187

 

15,896

 

16,183

 

15,860

 

Weighted average stock options outstanding

 

37

 

216

 

209

 

219

 

Diluted weighted average shares outstanding

 

16,224

 

16,112

 

16,392

 

16,079

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share

 

$

0.20

 

$

0.38

 

$

0.79

 

$

0.68

 

 

 

 

 

 

 

 

 

 

 

Potentially dilutive shares excluded from diluted per share amounts:

 

 

 

 

 

 

 

 

 

Stock options

 

133

 

146

 

133

 

163

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Stock options

 

653

 

306

 

468

 

428

 

 

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 each of the years presented.

 

(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 17, 2014, the Company announced a cash dividend of $0.10 per common share in an aggregate amount of $1,618 that was paid on April 7, 2014, to shareholders of record on March 28, 2014. On May 7, 2014, the Company announced a cash dividend of $0.10 per common share in an aggregate amount of $1,619 that was paid on June 2, 2014, to shareholders of record on May 21, 2014.

 

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. Due to a blackout period beginning in mid-December 2013 and the

 

12



Table of Contents

 

subsequent negotiations with Fosun Pharma for a strategic alliance, the Company has not repurchased any shares of its common stock under the share repurchase program in 2014. At June 30, 2014, the remaining balance available for repurchases under the program was $7,454.

 

Share-Based Compensation

 

Stock option activity for the six months ended June 30, 2014, is as follows:

 

 

 

Number of
Shares

 

Weighted Average
Exercise
Price Per Share

 

Options outstanding at December 31, 2013

 

1,926

 

$

12.54

 

Granted

 

258

 

15.38

 

Expired

 

(16

)

13.55

 

Exercised

 

(24

)

8.84

 

Options outstanding at June 30, 2014

 

2,144

 

12.92

 

 

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 have already vested 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 six-month period ended June 30, 2014, the Company issued options to purchase 258 shares of common stock under the 2012 Stock Incentive Plan to the Company’s executive officers and other employees, which are composed of time-based stock options. These options were issued with a weighted-average exercise price of $15.38 per share and a weighted-average grant date fair value of $6.53 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 six-month period ended June 30, 2014:

 

 

 

2014

 

Expected life (in years)

 

6.0

 

Risk-free interest rate

 

1.5

 

Expected volatility

 

56.7

 

Dividend yield

 

2.6

 

 

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. On August 29, 2013, the Company paid a special one-time cash dividend of $1.50 per common share. The Company has excluded this special one-time cash dividend from the dividend yield used in the Black-Scholes option-pricing model calculations as it is not representative of future dividends to be declared by the Company.

 

Share-based compensation expense from time-based stock options for the three-month periods ended June 30, 2014 and 2013, was approximately $719 and $729, respectively; the related tax benefit was approximately $284 and $288, respectively. Share-based compensation expense from time-based stock options for the six-month periods ended June 30, 2014 and 2013, was approximately $1,616 and $1,803, respectively; the related tax benefit was approximately $638 and $712, respectively. As of June 30, 2014 and December 31, 2013, the unrecognized share-based compensation expense related to the grants described above was $3,293 and $3,294, respectively. As of June 30, 2014, the remaining compensation cost is expected to be recognized over the weighted-average period of approximately 1.9 years.

 

The Company has not recognized any share-based compensation expense related to the net sales revenue performance-based stock options for the six-month period ended June 30, 2014.  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 $800 of potential share-based compensation expense.

 

At June 30, 2014, the aggregate intrinsic value of outstanding stock options to purchase 2,144 shares of common stock, exercisable stock options to purchase 1,096 shares of common stock and stock options to purchase 869 shares of common stock that

 

13



Table of Contents

 

are expected to vest was $8,975, $6,498 and $2,353, respectively. At December 31, 2013, the aggregate intrinsic value of outstanding options to purchase 1,926 shares of common stock, the exercisable options to purchase 838 shares of common stock, and options to purchase 905 shares of common stock expected to vest was $9,415, $6,069 and $3,179, respectively.

 

Restricted stock unit activity for the period ended June 30, 2014 is as follows:

 

 

 

Number of
Shares

 

Weighted Average
Grant Date
Fair Value

 

Units outstanding at December 31, 2013

 

32

 

$

12.47

 

Granted

 

140

 

13.85

 

Issued

 

 

 

Forfeited

 

(3

)

14.38

 

Units outstanding at June 30, 2014

 

169

 

13.39

 

 

During the six-month period ended June 30, 2014, the Company issued 140 restricted stock units (RSUs) of common stock under the 2012 Incentive Plan to the Company’s Board, executive officers and other employees. The RSUs were issued with a weighted average grant date fair value of $13.85 per share and vest in annual installments over a four year period from the grant date.

 

RSUs are valued at the market value on the date of grant, which is the grant date share price discounted for expected dividend payments during the vesting period.  For RSUs with 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. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model discount for lack of marketability is approximately 17.5 percent for a common share.

 

Share-based compensation expense from RSUs for the three-month periods ended June 30, 2014 and 2013, was approximately $269 and $52, respectively; the related tax benefit was approximately $106 and $18, respectively. Share-based compensation expense from RSUs for the six-month periods ended June 30, 2014 and 2013, was approximately $466 and $127, respectively; the related tax benefit was approximately $184 and $44, respectively. As of June 30, 2014 and December 31, 2013, the unrecognized share-based compensation expense related to the grants described above was $1,533 and $62, respectively. As of June 30, 2014, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 2.1 years.

 

(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 selling and Distributor compensation plans and has products with formulations that are sufficiently different from those of the 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 (loss) by segment before consideration of certain inter-segment transfers and expenses.

 

14



Table of Contents

 

Reportable business segment information is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net sales revenue:

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe

 

$

49,000

 

$

53,416

 

$

99,673

 

$

106,553

 

NSP Russia, Central and Eastern Europe

 

12,838

 

14,978

 

27,875

 

31,118

 

Synergy WorldWide

 

32,487

 

25,281

 

62,530

 

52,483

 

Total net sales revenue

 

94,325

 

93,675

 

190,078

 

190,154

 

 

 

 

 

 

 

 

 

 

 

Contribution margin (1):

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe

 

19,725

 

22,305

 

40,646

 

44,261

 

NSP Russia, Central and Eastern Europe

 

4,563

 

5,523

 

9,959

 

11,506

 

Synergy WorldWide

 

11,831

 

8,692

 

22,444

 

17,812

 

Total contribution margin

 

36,119

 

36,520

 

73,049

 

73,579

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

30,305

 

28,709

 

60,063

 

58,826

 

Total operating income

 

5,814

 

7,811

 

12,986

 

14,753

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

(378

)

1,482

 

(1,493

)

1,812

 

Income before provision for income taxes

 

$

5,436

 

$

9,293

 

$

11,493

 

$

16,565

 

 


(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 and South Korea comprise 10 percent or more of consolidated net sales revenue for the three and six-month periods ended June 30, 2014 and 2013, as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net sales revenue:

 

 

 

 

 

 

 

 

 

United States

 

$

37,932

 

$

40,195

 

$

75,547

 

$

79,343

 

South Korea

 

14,336

 

6,894

 

26,707

 

13,615

 

Other

 

42,057

 

46,586

 

87,824

 

97,196

 

 

 

$

94,325

 

$

93,675

 

$

190,078

 

$

190,154

 

 

15



Table of Contents

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

General health

 

$

22,091

 

$

22,312

 

$

43,402

 

$

44,784

 

Immune

 

5,388

 

5,934

 

11,970

 

12,920

 

Cardiovascular

 

3,272

 

3,812

 

6,763

 

7,247

 

Digestive

 

14,156

 

15,572

 

29,067

 

31,018

 

Personal care

 

1,058

 

1,381

 

2,110

 

2,862

 

Weight management

 

3,035

 

4,405

 

6,361

 

7,722

 

 

 

49,000

 

53,416

 

99,673

 

106,553

 

NSP Russia, Central and Eastern Europe:

 

 

 

 

 

 

 

 

 

General health

 

$

4,831

 

$

5,499

 

$

10,376

 

$

11,259

 

Immune

 

1,500

 

1,734

 

3,468

 

3,835

 

Cardiovascular

 

789

 

1,102

 

1,727

 

2,240

 

Digestive

 

3,451

 

4,020

 

7,398

 

8,066

 

Personal care

 

1,468

 

1,754

 

3,336

 

4,113

 

Weight management

 

799

 

869

 

1,570

 

1,605

 

 

 

12,838

 

14,978

 

27,875

 

31,118

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

General health

 

$

11,689

 

$

9,108

 

$

22,442

 

$

17,776

 

Immune

 

256

 

416

 

467

 

808

 

Cardiovascular

 

11,652

 

9,580

 

22,096

 

20,669

 

Digestive

 

4,953

 

3,958

 

9,970

 

8,822

 

Personal care

 

1,734

 

1,531

 

3,470

 

3,273

 

Weight management

 

2,203

 

688

 

4,085

 

1,135

 

 

 

32,487

 

25,281

 

62,530

 

52,483

 

 

 

$

94,325

 

$

93,675

 

$

190,078

 

$

190,154

 

 

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

 

 

 

June 30,
2014

 

December 31,
2013

 

Property, plant and equipment:

 

 

 

 

 

United States

 

$

35,271

 

$

25,713

 

Venezuela

 

3,016

 

3,207

 

Other

 

2,779

 

3,102

 

Total property, plant and equipment

 

$

41,066

 

$

32,022

 

 

(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 June 30, 2014 and 2013, the Company’s provision (benefit) for income taxes, as a percentage of income before income taxes was 40.5 percent and 34.9 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the six months ended June 30, 2014 and 2013, the Company’s provision (benefit) for income taxes, as a percentage of income before income taxes was (12.2) percent and 34.1 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 June 30, 2014, was primarily attributed to state taxes and an increase in tax liabilities associated with uncertain tax positions, offset by a favorable domestic manufacturing deduction and net favorable foreign items related to tax rate differences and adjustments to foreign valuation allowances.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended June 30, 2013, was primarily attributed to an increase in tax liabilities associated with uncertain tax positions, in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances.

 

16


 


Table of Contents

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the six months ended June 30, 2014, was primarily attributed to foreign tax credits arising from intercompany dividends of $21,500 paid by foreign subsidiaries to the U.S. corporation. This discrete item resulted in an income tax benefit of $6,720 for the six months ended June 30, 2014.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the six months ended June 30, 2013, was primarily attributed to an increase in tax liabilities associated with uncertain tax positions, in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances .

 

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, although it is unlikely that these items will again have an impact as large as what occurred in the six months ended June 30, 2014. Depending on various factors, changes from the foregoing items may be favorable or unfavorable in a particular period.

 

The Company’s U.S. federal income tax returns for 2009 through 2012 are open to examination for federal tax purposes. 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. The Company has several foreign tax jurisdictions that have open tax years from 2007 through 2013.

 

As of June 30, 2014, the Company had accrued $13,223 of liabilities related to unrecognized tax benefits compared with $12,402, as of December 31, 2013. This net increase was primarily attributed to transfer pricing contingencies, including increases in penalties and interest.

 

Although the Company believes its estimates are reasonable, the Company can make no assurance 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.  Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.

 

(10)              Commitments and Contingencies

 

Legal Proceedings

 

The Company is party to various legal proceedings. 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.

 

Since late 2007, the Company has administered its sales in Belarus, Georgia, Kazakhstan, Moldova, Mongolia, Russia and Ukraine (the “Territories”) through an International Reseller Agreement (“Reseller Agreement”) with a third party general dealer (the “General Dealer”) based in Russia. The General Dealer administers the marketing and distribution of the Company’s products in the Territories. As a part of its services, the General Dealer provides certain discounts (the “Discounts”) to its network of dealers related to the costs associated with transporting the Company’s products from the General Dealer to the dealers.  In July 2013, the General Dealer began to withhold the amount of these Discounts from the funds remitted each month to the Company for the sale of the products, claiming that it is entitled to reimbursement for these costs under the Reseller Agreement.  These withholdings averaged approximately $330 per month and totaled approximately $3,000 at March 31, 2014.

 

The parties negotiated a resolution to the dispute, whereby the General Dealer paid the Company the $3,000 of Discounts withheld and relinquished all claims to the reimbursement of Discounts with respect to periods prior to July 2013, and the parties agreed to a new three-year international reseller agreement, effective April 1, 2014.

 

17



Table of Contents

 

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 June 30, 2014 and December 31, 2013, accrued liabilities include $4,759 and $6,312, 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 of the ultimate outcomes, if greater than the amounts accrued, would have on the financial condition, results of operations or cash flows of the Company.

 

Other Litigation

 

The Company is party to various other legal proceedings in several foreign jurisdictions related to value-added tax assessments and other civil litigation.  While there is a reasonable possibility that a 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 $800.

 

(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 June 30, 2014:

 

 

 

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

 

$

 

$

406

 

$

 

$

406

 

U.S. government security funds

 

987

 

 

 

987

 

Equity securities

 

631

 

 

 

631

 

Investment securities

 

1,022

 

 

 

1,022

 

Total assets measured at fair value on a recurring basis

 

$

2,640

 

$

406

 

$

 

$

3,046

 

 

18



Table of Contents

 

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

 

$

 

$

415

 

$

 

$

415

 

U.S. government security funds

 

983

 

 

 

983

 

Equity securities

 

608

 

 

 

608

 

Investment securities

 

971

 

 

 

971

 

Total assets measured at fair value on a recurring basis

 

$

2,562

 

$

415

 

$

 

$

2,977

 

 

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 valued using quoted prices in active markets.

 

For the six months ended June 30, 2014, and for the year ended December 31, 2013, 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 six months ended June 30, 2014 and 2013, 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, 2013,our Quarterly Report on Form 10-Q for the period ended March 31, 2014, 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 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, selling 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.

 

19



Table of Contents

 

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, Italy, 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, Ukraine, the United Kingdom, the United States, Venezuela and Vietnam. We export our products to Argentina, Australia, Chile, Israel, New Zealand, Norway and the United Kingdom.

 

During the second quarter of 2014, we experienced an increase in our consolidated net sales of 0.7 percent compared to the second quarter of 2013 (or 1.1 percent in local currencies). Synergy WorldWide net sales increased approximately 28.5 percent compared to the same period in 2013 (or 23.9 percent in local currencies). NSP Russia, Central and Eastern Europe net sales decreased approximately 14.3 percent compared to the same period in 2013.  NSP Americas, Asia Pacific and Europe net sales decreased approximately 8.3 percent compared to the same period in 2013 (or 5.4 percent in local currencies). Our most significant sales revenue growth was from our Synergy South Korea market during 2014. Gains in this market were partially offset by decreases in our NSP Russia, Central and Eastern Europe market and in our North American markets included within our NSP Americas, Asia Pacific and Europe and Synergy WorldWide segments.

 

Despite the robust net sales growth experienced in NSP Russia, Central and Eastern Europe in 2013, the Company must caution that near-term growth will undoubtedly be impacted by the political unrest in Ukraine and Russia. Also, the Company has negotiated a resolution to the contract dispute with its General Dealer, whereby the General Dealer paid the Company the entire sum of Discounts withheld and relinquished all claims to the reimbursement of Discounts with respect to periods prior to July 2013, and the parties agreed to a new three-year international reseller agreement, effective April 1, 2014. Under the terms of the new international seller agreement, the Company will pay an additional variable management fee of approximately $1.5 to $2.0 million annually going forward based upon current sales trends.

 

Over the same period, selling, general and administrative costs as a percentage of net sales revenue for 2014, increased to 32.1 percent from 30.6 percent in 2013. The increase in selling, general and administrative expenses was primarily related to professional fees of $0.8 million incurred in connection with the negotiation and execution of the strategic alliance with Fosun Pharma and $1.1 million associated with the evaluation of and negotiation with a company in an alternative distribution channel, which we ultimately declined to pursue.

 

We distribute our products to consumers through an independent sales force comprised of 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 15,700 and 17,100, and active Distributors and customers were approximately 302,500 and 331,000, at June 30, 2014 and 2013, 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.

 

20



Table of Contents

 

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 June 30, 2014 and 2013 (dollar amounts in thousands).

 

 

 

Three Months Ended June 30,

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

Total

 

 

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

dollars

 

Percentage

 

Net sales revenue

 

$

94,325

 

100.0

%

$

93,675

 

100.0

%

$

650

 

0.7

%

Cost of sales

 

(23,372

)

(24.8

)

(22,630

)

(24.2

)

(742

)

(3.3

)

 

 

70,953

 

75.2

 

71,045

 

75.8

 

(92

)

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume incentives

 

34,834

 

36.9

 

34,525

 

36.9

 

309

 

0.9

 

SG&A expenses

 

30,305

 

32.1

 

28,709

 

30.6

 

1,596

 

5.6

 

Operating income

 

5,814

 

6.2

 

7,811

 

8.3

 

(1,997

)

(25.6

)

Other income (loss), net

 

(378

)

(0.4

)

1,482

 

1.6

 

(1,860

)

(125.5

)

Income before provision for income taxes

 

5,436

 

5.8

 

9,293

 

9.9

 

(3,857

)

(41.5

)

Provision for income taxes

 

2,202

 

2.4

 

3,241

 

3.4

 

(1,039

)

(32.1

)

Net income

 

$

3,234

 

3.4

%

$

6,052

 

6.5

%

$

(2,818

)

(46.6

)%

 

The following table summarizes our unaudited consolidated operating results in U.S. dollars and as a percentage of net sales revenue for the six months ended June 30, 2014 and 2013 (dollar amounts in thousands).

 

 

 

Six Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

Total

 

 

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

dollars

 

Percentage

 

Net sales revenue

 

$

190,078

 

100.0

%

$

190,154

 

100.0

%

$

(76

)

(0.0

)%

Cost of sales

 

(46,478

)

(24.5

)

(47,075

)

(24.8

)

597

 

1.3

 

 

 

143,600

 

75.5

 

143,079

 

75.2

 

521

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume incentives

 

70,551

 

37.1

 

69,500

 

36.5

 

1,051

 

1.5

 

SG&A expenses

 

60,063

 

31.6

 

58,826

 

30.9

 

1,237

 

2.1

 

Operating income

 

12,986

 

6.8

 

14,753

 

7.8

 

(1,767

)

(12.0

)

Other income (loss), net

 

(1,493

)

(0.8

)

1,812

 

0.9

 

(3,305

)

(182.4

)

Income before provision for income taxes

 

11,493

 

6.0

 

16,565

 

8.7

 

(5,072

)

(30.6

)

Provision (benefit) for income taxes

 

(1,406

)

(0.8

)

5,649

 

3.0

 

(7,055

)

(124.9

)

Net income

 

$

12,899

 

6.8

%

$

10,916

 

5.7

%

$

1,983

 

18.2

%

 

Net Sales Revenue

 

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 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.

 

21



Table of Contents

 

The following table summarizes the changes in our net sales revenue by operating segment with a reconciliation to net sales revenue excluding the impact of currency fluctuations for the three months ended June 30, 2014 and 2013;

 

 

 

Net Sales Revenue by Operating Segment

 

 

 

Three Months
Ended June 30,
2014

 

Three Months
Ended June 30,

2013

 

Percent
Change

 

Impact of
Currency
Exchange

 

Percent
Change
Excluding
Impact of
Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

 

 

NSP North America

 

$

36,829

 

$

38,946

 

(5.4

)%

$

(197

)

(4.9

)%

NSP Latin America

 

11,265

 

12,088

 

(6.8

)

(1,323

)

4.1

 

NSP Other

 

906

 

2,382

 

(62.0

)

 

(62.0

)

 

 

49,000

 

53,416

 

(8.3

)

(1,520

)

(5.4

)

 

 

 

 

 

 

 

 

 

 

 

 

NSP Russia, Central and Eastern Europe

 

$

12,838

 

$

14,978

 

(14.3

)%

$

14

 

(14.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

 

 

Synergy North America

 

$

4,140

 

$

4,579

 

(9.6

)%

$

 

(9.6

)%

Synergy Asia Pacific

 

20,581

 

13,127

 

56.8

 

794

 

50.7

 

Synergy Europe

 

7,766

 

7,575

 

2.5

 

372

 

(2.4

)

 

 

32,487

 

25,281

 

28.5

 

1,166

 

23.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

94,325

 

$

93,675

 

0.7

%

$

(340

)

1.1

%

 

The following table summarizes the changes in our net sales revenue by operating segment with a reconciliation to net sales revenue excluding the impact of currency fluctuations for the six months ended June 30, 2014 and 2013;

 

 

 

Net Sales Revenue by Operating Segment

 

 

 

Six Months
Ended June 30,
2014

 

Six Months
Ended June 30,

2013

 

Percent
Change

 

Impact of
Currency
Exchange

 

Percent
Change
Excluding
Impact of
Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

 

 

NSP North America

 

$

73,743

 

$

77,601

 

(5.0

)%

$

(503

)

(4.3

)%

NSP Latin America

 

23,317

 

23,978

 

(2.8

)

(1,901

)

5.2

 

NSP Other

 

2,613

 

4,974

 

(47.5

)

69

 

(48.9

)

 

 

99,673

 

106,553

 

(6.5

)

(2,335

)

(4.3

)

 

 

 

 

 

 

 

 

 

 

 

 

NSP Russia, Central and Eastern Europe

 

$

27,875

 

$

31,118

 

(10.4

)%

$

21

 

(10.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

 

 

Synergy North America

 

$

8,099

 

$

8,769

 

(7.6

)%

$

 

(7.6

)%

Synergy Asia Pacific

 

39,176

 

27,270

 

43.7

 

348

 

42.4

 

Synergy Europe

 

15,255

 

16,444

 

(7.2

)

639

 

(11.1

)

 

 

62,530

 

52,483

 

19.1

 

987

 

17.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

190,078

 

$

190,154

 

(0.0

)%

$

(1,327

)

0.7

%

 

Consolidated net sales revenue for the three and six months ended June 30, 2014, was $94.3 million and $190.1 million compared to $93.7 million and $190.2 million for the same periods in 2013, or an increase of approximately 0.7 percent and flat, respectively. We experienced a $0.3 million and $1.3 million unfavorable impact in foreign currency exchange rate fluctuations in the three and six months ended June 30, 2014 and 2013, respectively, and our consolidated net sales revenue would have increased by 1.1 percent and 0.7 percent from 2013, excluding the negative impact. The increase in local currency net sales revenue for the three and six months ended June 30, 2014, compared to the same periods in 2013, is primarily due to an increase of net sales in our Synergy

 

22



Table of Contents

 

WorldWide segment and was partially offset by a decline of net sales in our NSP Americas, Asia Pacific and Europe and NSP Russia, Central and Eastern Europe segments.

 

NSP Americas, Asia Pacific and Europe

 

Net sales revenue related to NSP Americas, Asia Pacific and Europe for the three and six months ended June 30, 2014, was $49.0 million and $99.7 million, compared to $53.4 million and $106.6 million for the same periods in 2013, or decreases of 8.3 percent and 6.5 percent, respectively. In local currency, net sales decreased 5.4 percent and 4.3 percent, compared to the same periods in 2013, respectively. Fluctuations in foreign exchange rates had a $1.5 million and $2.3 million unfavorable impact on net sales for the three and six months ended June 30, 2014, respectively. Active Managers within NSP Americas, Asia Pacific and Europe totaled approximately 7,800 and 9,000 at June 30, 2014 and 2013, respectively. Active Distributors and customers within NSP Americas, Asia Pacific and Europe totaled approximately 142,700 and 155,400 at June 30, 2014 and 2013, respectively. Segment net sales revenue and the number of Managers, Distributors and customers decreased primarily due to combining our NSP Japan business with our Synergy Japan business, the transition of the NSP United Kingdom business to an export market, and lower net sales in the United States. Managers and Distributors within NSP Americas, Asia Pacific and Europe are predominantly practitioners, retailers and consumers of our products. The Active Managers category includes 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 Distributors and customers who have purchased products directly from the Company for resale and/or personal consumption during the previous three months.

 

Notable activity in the following markets contributed to the results of NSP Americas, Asia Pacific and Europe:

 

In the United States, net sales revenues decreased approximately $1.8 million and $3.1 million, or 5.1 percent and 4.4 percent, for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013.  The second quarter of 2014 was adversely impacted by the movement of our national convention from the second quarter to first quarter, which transferred promotion sales from product launches at the convention to March 2014. Despite the change in convention timing, our new sales programs are continuing to gain traction, and we are beginning to see business improvement in those Distributor leaders that have been early adopters of the programs. However, many of our Distributors are still in the learning phase of these new programs, and it will take time to see overall momentum develop.

 

In Venezuela, net sales revenues decreased approximately $0.4 million and $0.2 million, or 21.1 percent and 5.4 percent, for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. In local currency, net sales increased 35.6 percent and 27.7 percent, respectively, compared to the same periods in 2013. Fluctuations in foreign exchange rates had a $1.3 and $1.1 million unfavorable impact on net sales for the three and six months ended June 30, 2014, respectively, as the Company began reporting its results at the higher SICAD 1 exchange rate of 11.3 effective March 31, 2014. The increase in local currency net sales is due to price increases designed to offset the inflationary environment in addition to increased Manager and Distributor activity.

 

Due to the continued challenges in returning the NSP Japan business to growth, we made the decision to cease to operate under the NSP brand and to merge our NSP Japan business with our Synergy Japan business to create one unified approach to the market with a common product offering and business opportunity model. As part of this transition, we allowed NSP Japan Distributors to transfer their businesses to our Synergy Japan brand. The combined businesses began operating as Synergy Japan in January 2014, and provide a greater opportunity for a return to profitable growth. As such, we had no net sales revenue from NSP Japan for the three and six months ended June 30, 2014, compared to approximately $0.9 million and $1.7 million of net sales revenue for the same periods in 2013.

 

Due to the size of the NSP United Kingdom market, lack of net sales growth, and continuing operating losses, we made the decision to transition our NSP United Kingdom market to an export market, in which we sell our products to a locally managed entity independent of the Company that has distribution rights for the market, effective April 1, 2014. As such, our net sales revenue declined by $0.9 million as compared to the same period in 2013.

 

NSP Russia, Central and Eastern Europe

 

Net sales revenue related to NSP Russia, Central and Eastern Europe markets (primarily Russia, Ukraine, and Belarus) for the three and six months ended June 30, 2014, was $12.8 million and $27.9 million, respectively, compared to $15.0 million and $31.1 million for the same periods in 2013, or decreases of 14.3 percent and 10.4 percent, respectively. Active Managers within NSP Russia, Central and Eastern Europe totaled approximately 4,600 and 5,000 at June 30, 2014 and 2013, respectively. Active Distributors and customers within NSP Russia, Central and Eastern Europe totaled approximately 105,900 and 120,900 at June 30, 2014 and 2013,

 

23



Table of Contents

 

respectively. Net sales and the number of Managers, Distributors and customers buying and distributing our products decreased primarily as a result of the current political uncertainty in Ukraine and across the region, and the market decline in the value of the Ukrainian hryvnia and Russian ruble against the U.S. dollar. Although changes in exchange rates between the U.S. dollar and Ukrainian hryvnia do not result in currency fluctuations within our financial statements, the Company’s products in Ukraine and Russia are priced in U.S. dollars and therefore become more expensive when the local currency declines in value. At this time, we cannot estimate to what extent this unrest may have on our future results. Should the situation in the region escalate, our results could experience some weaknesss as a result. Nevertheless, our strong and renewed partnership with our local partner should provide a solid foundation to reignite growth once the situation stabilizes.

 

Synergy WorldWide

 

Net sales revenue related to Synergy WorldWide for the three and six months ended June 30, 2014, was $32.5 million, and $62.5 million, respectively, compared to $25.3 million and $52.5 million for the same periods in 2013, or increases of 28.5 percent and 19.1 percent, respectively. Fluctuations in foreign exchange rates had a $1.2 million and $1.0 million favorable impact on net sales for the three and six months ended June 30, 2014, respectively, and net sales revenue would have increased by 23.9 percent and 17.3 percent from 2013, excluding the positive impact, respectively. Active Managers within Synergy WorldWide totaled approximately 3,300 and 3,100 at June 30, 2014 and 2013, respectively. Active Distributors and customers within Synergy WorldWide totaled approximately 53,900 and 54,700 at June 30, 2014 and 2013, respectively. Synergy WorldWide’s business model is operating under a traditional direct selling approach. Synergy WorldWide reported a growth of net sales revenue due to improvements in South Korea and Japan, partially offset by lower net sales in Europe and North America.

 

Notable activity in the following markets contributed to the results of Synergy WorldWide:

 

In South Korea, net sales revenues increased approximately $7.4 million and $13.1 million, or increases of 108.0 percent and 96.2 percent, for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. In local currency, net sales increased 90.7 percent and 86.0 percent, respectively, compared to the same periods in 2013. Fluctuations in foreign exchange rates had a $1.2 and $1.4 million favorable impact on net sales for the three and six months ended June 30, 2014, respectively. Momentum has been sustained since September 2013 due to the Synergy WorldWide global summit held in South Korea and the launch of the SLMsmart weight-management program, which further contributed to sustained growth in combination with the continued strong Distributor leadership in this market.

 

In Japan, net sales revenues increased approximately $1.0 million and $1.6 million, or increases of 54.8 percent and 39.8 percent, for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. In local currency, net sales increased 59.4 percent and 50.3 percent, respectively, compared to the same periods in 2013. Fluctuations in foreign exchange rates had a $0.1 and $0.4 million unfavorable impact on net sales for the three and six months ended June 30, 2014, respectively. In the second half of 2013, we introduced new products and implemented programs to stimulate activity, which had a positive impact in this market. In addition, as referenced above, in order to provide a more stable platform for growth, we made the decision to cease to operate under the NSP brand in Japan and to combine the NSP Japan and Synergy Japan businesses, and operate as a single entity from January 2014 forward. As part of this transition, we provided certain NSP products, a business opportunity and encouraged NSP Japan Distributors to transfer their businesses to our Synergy Japan brand. Due to the seamless transition of the previous NSP Japan Managers and Distributors to the Synergy brand, we were able to successfully maintain $0.4 million and $0.7 million in net sales revenue that was attributable NSP Japan’s historical sales force.

 

In Europe, net sales revenues increased approximately $0.2 million and decreased $1.2 million, or an increase of 2.5 percent and a decrease of 7.2 percent, for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. In local currency, net sales decreased 2.4 percent and 11.1 percent, respectively, compared to the same periods in 2013. Fluctuations in foreign exchange rates had a $0.4 and $0.6 million favorable impact on net sales for the three and six months ended June 30, 2014, respectively. The successful resolution of temporary shipping restrictions imposed by the Norwegian Food Authority, which had adversely impacted net sales in the fourth quarter of 2012, had a favorable impact on the first half of 2013 net sales. Subsequent to this resolution, our Norway market has not returned to its previous growth rate thus resulting in a decline in net sales. Growth in several other European markets has been more than offset by the decline in Norway net sales,

 

In North America, net sales revenues decreased approximately $0.4 million and $0.7 million, or decreases of 9.6 percent and 7.6 percent, for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. The decline in sales is primarily driven by lower Distributor recruiting.  Growth initiatives have been developed and implemented to more effectively support recruiting and Distributor training and motivation.

 

24


 


Table of Contents

 

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 increased slightly to 24.8 percent and decreased to 24.5 percent for the three and six months ended June 30, 2014, respectively, compared to 24.2 percent and 24.8 percent for the same periods in 2013. The increase in the cost of sales percentage for the three months ended June 30, 2014, was primarily due to discounting associated with product promotions designed to stimulate sales growth. The decrease in the cost of sales percentage for the six months ended June 30, 2014, was primarily due to changes in product mix between markets, lower raw material costs as well as lower in market distribution costs, partially offset by product discounting.

 

Volume Incentives

 

Volume incentives as a percent of net sales revenue increased to 37.1 percent for the six months ended June 30, 2014, compared to 36.5 percent for the same period in 2013. The year-to-date increase was primarily due to net sales increases in markets that pay a higher sales commission in our Synergy WorldWide segment.

 

Selling, General and Administrative

 

Selling, general and administrative expenses increased by approximately $1.6 million and $1.2 million to $30.3 million and $60.1 million for the three and six months ended June 30, 2014 and 2013, respectively. Selling, general and administrative expenses were 32.1 percent and 31.6 percent of net sales revenue for the three and six months ended June 30, 2014 and 2013, compared to 30.6 percent and 30.9 percent for the same periods in 2013, respectively. The increase in selling, general and administrative expenses was primarily related to professional fees of $0.8 million due to the strategic alliance with Fosun Pharma and $1.1 million the evaluation of and negotiation with a company with an alternative distribution channel, which we ultimately declined to pursue.

 

Other Income (Expense), Net

 

Other income (expense), net for the three and six months ended June 30, 2014, decreased $1.9 million and $3.3 million compared to the same periods in 2013, respectively, due to foreign exchange rate losses, principally due to losses of $0.8 million incurred in Venezuela.

 

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 June 30, 2014 and 2013, the Company’s provision (benefit) for income taxes, as a percentage of income before income taxes was 40.5 percent and 34.9 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the six months ended June 30, 2014 and 2013, the Company’s provision (benefit) for income taxes, as a percentage of income before income taxes was (-12.2 percent) and 34.1 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 June 30, 2014, was primarily attributed to state taxes and an increase in tax liabilities associated with uncertain tax positions, offset by a favorable domestic manufacturing deduction and net favorable foreign items related to tax rate differences and adjustments to foreign valuation allowances.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended June 30, 2013, was primarily attributed to an increase in tax liabilities associated with uncertain tax positions, in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the six months ended June 30, 2014, was primarily attributed to foreign tax credits arising from intercompany dividends of $21.5 million paid by foreign subsidiaries to the U.S. corporation. This discrete item resulted in an income tax benefit of $6.7 million for the six months ended June 30, 2014.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the six months ended June 30, 2013, was primarily attributed to an increase in tax liabilities associated with uncertain tax positions, in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances.

 

25



Table of Contents

 

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, although it is unlikely that these items will again have an impact as large as what occurred in the six months ended June 30, 2014. Depending on various factors, changes from the foregoing items may be favorable or unfavorable in a particular period.

 

The Company’s U.S. federal income tax returns for 2009 through 2012, are open to examination for federal tax purposes. 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. The Company has several foreign tax jurisdictions that have open tax years from 2007 through 2013.

 

As of June 30, 2014, the Company had accrued $13.2 million of liabilities related to unrecognized tax benefits compared with $12.4 million as of December 31, 2013. This net increase was primarily attributed to transfer pricing contingencies, including increases in penalties and interest.

 

Although the Company believes its estimates are reasonable, the Company can make no assurance 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.  Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.

 

Product Categories

 

Our line of over 700 products includes several different product classifications, such as immune, cardiovascular, digestive, personal care, weight management and other general health products. 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 products in accordance with our 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 general health, immune, cardiovascular, digestive, personal care and weight management products for the three and six months ended June 30, 2014 and 2013, by business segment.

 

 

 

Three Months Ended
June 30,

 

 

 

2014

 

2013

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

General health

 

$

22,091

 

45.1

%

$

22,312

 

41.8

%

Immune

 

5,388

 

11.0

 

5,934

 

11.1

 

Cardiovascular

 

3,272

 

6.7

 

3,812

 

7.1

 

Digestive

 

14,156

 

28.9

 

15,572

 

29.2

 

Personal care

 

1,058

 

2.1

 

1,381

 

2.6

 

Weight management

 

3,035

 

6.2

 

4,405

 

8.2

 

Total NSP Americas, Asia Pacific and Europe

 

49,000

 

100.0

%

53,416

 

100.0

%

 

 

 

 

 

 

 

 

 

 

NSP Russia, Central and Eastern Europe:

 

 

 

 

 

 

 

 

 

General health

 

$

4,831

 

37.6

%

$

5,499

 

36.7

%

Immune

 

1,500

 

11.7

 

1,734

 

11.6

 

Cardiovascular

 

789

 

6.2

 

1,102

 

7.4

 

Digestive

 

3,451

 

26.9

 

4,020

 

26.8

 

Personal care

 

1,468

 

11.4

 

1,754

 

11.7

 

Weight management

 

799

 

6.2

 

869

 

5.8

 

Total NSP Russia, Central and Eastern Europe

 

12,838

 

100.0

%

14,978

 

100.0

%

 

26



Table of Contents

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

General health

 

$

11,689