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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to __________________
Commission File #0-8707
NATURE'S SUNSHINE PRODUCTS, INC.
--------------------------------
(Exact Name of Registrant)
UTAH 87-0327982
(State of Incorporation) (I.R.S. Employer Identification Number)
75 East 1700 South
Provo, Utah 84606
(Principal Executive Offices)
(801) 342-4300, Ext. 4407
(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 such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of common stock, without par value, outstanding as of
October 31, 1996, was 18,977,889.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar Amounts In Thousands)
(Unaudited)
September 30 December 31
1996 1995
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $22,593 $14,172
Accounts receivable, net 7,872 6,042
Inventories 24,837 23,127
Prepaid expenses and other 9,167 3,619
Notes receivable due from related parties 100 213
------- -------
Total Current Assets 64,569 47,173
PROPERTY, PLANT AND
EQUIPMENT, net 19,355 13,088
LONG-TERM INVESTMENTS 2,090 2,381
OTHER ASSETS 2,335 2,605
------- -------
$88,349 $65,247
------- -------
------- -------
The accompanying notes to the financial statements are an
integral part of these consolidated condensed balance sheets.
2
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(Dollar Amounts In Thousands)
(Unaudited)
September 30 December 31
1996 1995
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 2,573 $ 2,042
Accounts payable 4,414 5,031
Accrued volume incentives 9,388 7,207
Accrued liabilities 10,340 6,577
Income taxes payable 2,367 1,883
-------- --------
Total Current Liabilities 29,082 22,740
-------- --------
DEFERRED INCOME TAXES 1,059 1,002
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 20,000,000
shares authorized; 19,445,734 shares
issued 37,753 31,263
Retained earnings 29,498 19,214
Treasury stock, at cost, 484,145 and
1,011,607 shares at September 30,
1996 and December 31, 1995,
respectively (5,265) (4,942)
Receivables due from related parties (227) (293)
Cumulative translation adjustments (3,551) (3,737)
-------- --------
Total Shareholders' Equity 58,208 41,505
-------- --------
$ 88,349 $ 65,247
-------- --------
-------- --------
The accompanying notes to the financial statements are an
integral part of these consolidated condensed balance sheets.
3
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Amounts In Thousands, Except Per-Share Information)
Three Months Ended
September 30
------------------
(Unaudited)
1996 1995
---- ----
SALES REVENUE $63,031 $53,164
------- -------
COSTS AND EXPENSES:
Cost of goods sold 11,201 9,817
Volume incentives 28,976 24,222
Selling, general and administrative 16,009 13,860
------- -------
56,186 47,899
------- -------
OPERATING INCOME 6,845 5,265
------- -------
OTHER INCOME (EXPENSE):
Interest and other income 504 451
Interest expense (14) (49)
Foreign exchange loss, net (42) (263)
Minority interest (129) 312
------- -------
319 451
------- -------
INCOME BEFORE INCOME TAXES 7,164 5,716
PROVISION FOR INCOME TAXES 2,626 2,410
------- -------
NET INCOME $ 4,538 $ 3,306
------- -------
NET INCOME PER COMMON SHARE $ 0.23 $ 0.17
------- -------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,749 19,019
------- -------
The accompanying notes to the financial statements are an integral
part of these consolidated condensed statements of income.
4
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Amounts In Thousands, Except Per-Share Information)
Nine Months Ended
September 30
-------------------
(Unaudited)
1996 1995
------ ------
SALES REVENUE $186,325 $150,951
-------- --------
COSTS AND EXPENSES:
Cost of goods sold 33,150 28,570
Volume incentives 85,623 69,120
Selling, general and administrative 48,303 40,358
-------- --------
167,076 138,048
-------- --------
OPERATING INCOME 19,249 12,903
-------- --------
OTHER INCOME (EXPENSE):
Interest and other income 1,561 1,349
Interest expense (51) (146)
Foreign exchange loss, net (410) (475)
Minority interest (352) 558
-------- --------
748 1,286
-------- --------
INCOME BEFORE INCOME TAXES 19,997 14,189
PROVISION FOR INCOME TAXES 7,841 5,897
-------- --------
NET INCOME $ 12,156 $ 8,292
-------- --------
NET INCOME PER COMMON SHARE $ 0.62 $ 0.44
-------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,681 18,778
-------- --------
The accompanying notes to the financial statements are an integral
part of these consolidated condensed statements of income.
5
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
Nine Months Ended
September 30
-------------------
Increase (Decrease) in Cash and Cash Equivalents (Unaudited)
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales revenue $184,014 $148,977
Cash paid as volume incentives (83,442) (66,906)
Cash paid to suppliers and employees (83,067) (70,453)
Income taxes paid (7,299) (4,344)
Interest received 1,632 1,278
Interest paid (51) (146)
--------- --------
Net Cash Provided by Operating Activities 11,787 8,406
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,607) (2,272)
Purchase of other assets (135) (80)
Investment in subsidiaries --- (559)
Payments received on long-term receivables 172 343
Short-term related party receivables, net 246 (114)
Proceeds from sale of assets --- 258
Sale/Purchase of long-term investments 291 355
--------- --------
Net Cash Used in Investing Activities (8,033) (2,069)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tax benefit from exercise of stock options 4,606 635
Proceeds from exercise of stock options 3,215 771
Payment of cash dividends (1,872) (1,833)
Purchase of treasury stock (1,689) (1,298)
Proceeds from short-term debt, net 531 666
Issuance of treasury stock 35 ---
--------- --------
Net Cash Provided by (Used in) Financing
Activities 4,826 (1,059)
--------- --------
EFFECT OF EXCHANGE RATES ON CASH (159) (352)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,421 4,926
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,172 11,201
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,593 $ 16,127
--------- --------
--------- --------
The accompanying notes to the financial statements are an integral
part of these consolidated condensed statements of cash flows.
6
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
Reconciliation of Net Income to Net Cash Provided by Operating Activities
(Dollar Amounts In Thousands)
Nine Months Ended
September 30
-------------------
(Unaudited)
1996 1995
---- ----
NET INCOME $12,156 $8,292
------- -------
Depreciation and amortization 2,512 2,075
Bad debt expense 78 220
Increase in accounts receivable, net (1,908) (1,588)
Increase in inventories (1,710) (2,746)
Increase in prepaid expenses and other (5,553) (905)
Increase in income taxes payable 485 489
Increase in accrued liabilities and volume incentives 5,943 3,959
Decrease in accounts payable (617) (243)
Increase (decrease) in deferred income taxes 57 (393)
Cumulative translation adjustments 344 (754)
------- -------
Total Adjustments (369) 114
------- -------
Net Cash Provided by Operating Activities $11,787 $8,406
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The accompanying notes to the financial statements are an integral
part of these consolidated condensed statements of cash flows.
7
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL STATEMENT POLICIES AND DISCLOSURES
The unaudited, consolidated, condensed financial statements of Nature's
Sunshine Products, Inc. and subsidiaries included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally required in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
These consolidated, condensed financial statements reflect all
adjustments, which in the opinion of management, are necessary to a fair
statement of financial position as of September 30, 1996, and the results of
operations for the interim periods presented. All of the adjustments which
have been made in these consolidated, condensed financial statements are of a
normal recurring nature.
Weighted average number of common shares outstanding and all per share
amounts included in the condensed financial statements have been adjusted to
reflect the three-for-two stock split effected in March of 1996.
It is suggested that these consolidated, condensed financial statements
be read in conjunction with the financial statements and the notes thereto
included in the Company's latest Annual Report on Form 10-K.
2) INVENTORIES
Inventories consist of: (Dollars in Thousands)
(Unaudited)
September 30 December 31
1996 1995
---- ----
Raw materials $ 8,832 $ 7,772
Work in process 1,190 1,123
Finished goods 14,815 14,232
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$24,837 $23,127
------- -------
------- -------
8
(3) EARNINGS PER SHARE
Outstanding stock options are considered common stock equivalents and
are included in the computation of primary earnings per share.
As of September 30, 1996, the Company had a total of 2,855,729 options
outstanding. The options were all granted at market prices, which vary from
$1.79 to $22.25 per share.
(4) QUARTERLY CASH DIVIDENDS
The Company has declared 33 consecutive quarterly cash dividends. The
most recent quarterly cash dividend of 3 1/3 cents per common share was
declared on November 1, 1996, to shareholders of record on November 15,
payable November 29, 1996.
(5) TRANSLATION OF FOREIGN CURRENCY
The financial statements of the international subsidiaries have been
translated to U.S. dollars in accordance with the provisions of SFAS No. 52.
As a result of its international operations, the Company is subject to
foreign currency fluctuations which may impact current earnings.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY
The following table identifies (i) the relationship that net income items
disclosed in the consolidated condensed financial statements have to total
sales, and (ii) amount and percent of change of such items compared to the
corresponding prior period.
(Dollar Amounts In Thousands)
(Unaudited)
(i) (ii)
Income and Expense Three Months Ended September 30
Items as a Percent of Sales --------------------------------------
- --------------------------- 1996 to 1995 1995 to 1994
Three Months Ended ---------------------- ------------
September 30 Amount of Percent Percent
- --------------------------- Increase/ of of
1996 1995 Income and Expense Items (Decrease) Change Change
- ------- ------- ------------------------ --------- ------- -------
100.00% 100.00% Sales revenue $9,867 18.56% 29.66%
- ------- ------- ------ -------- ----------
17.77 18.47 Cost of sales 1,384 14.10 24.00
45.97 45.56 Volume incentives 4,754 19.63 29.60
25.40 26.07 SG&A expenses 2,149 15.51 26.80
- ------- ------- ------ -------- ----------
89.14 90.10 8,287 17.30 27.61
- ------- ------- ------ -------- ----------
10.86 9.90 Operating income 1,580 30.01 51.88
- ------- ------- ------ -------- ----------
0.80 0.85 Interest and other income 53 11.72 5,443.75
(0.02) (0.09) Interest expense 35 70.47 (54.53)
(0.07) (0.50) Foreign exchange loss 221 84.02 (2,704.98)
(0.20) 0.59 Minority interest (441) (141.33) 52.01
- ------- ------- ------ -------- ----------
0.51 0.85 (132) (29.49) 135.45
- ------- ------- ------ -------- ----------
11.37 10.75 Income before income taxes 1,448 25.31 56.26
- ------- -------
4.17 4.53 Provision for income taxes 216 8.99 67.76
- ------- ------- ------ -------- ----------
7.20% 6.22% Net income $1,232 37.29% 48.82%
- ------- ------- ------ -------- ----------
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY
The following table identifies (i) the relationship that net income items
disclosed in the consolidated condensed financial statements have to total
sales, and (ii) amount and percent of change of such items compared to the
corresponding prior period.
(Dollar Amounts In Thousands)
(Unaudited)
(i) (ii)
Income and Expense Nine Months Ended September 30
Items as a Percent of Sales --------------------------------------
- --------------------------- 1996 to 1995 1995 to 1994
Nine Months Ended ---------------------- ------------
September 30 Amount of Percent Percent
- --------------------------- Increase/ of of
1996 1995 Income and Expense Items (Decrease) Change Change
- ------- ------- ------------------------ --------- ------- -------
100.00% 100.00% Sales revenue $35,374 23.43% 29.40%
- ------- ------- ------- -------- --------
17.79 18.93 Cost of sales 4,580 16.03 27.12
45.96 45.78 Volume incentives 16,503 23.88 27.42
25.92 26.74 SG&A expenses 7,945 19.69 35.46
- ------- ------- ------- -------- --------
89.67 91.45 29,028 21.03 29.61
- ------- ------- ------- -------- --------
10.33 8.55 Operating income 6,346 49.18 14.48
- ------- ------- ------- -------- --------
0.84 0.89 Interest and other income 212 15.72 165.14
(0.03) (0.10) Interest expense 95 65.07 (361.07)
(0.22) (0.31) Foreign exchange loss 65 13.68 (85.28)
(0.19) 0.37 Minority interest (910) (163.08) 75.52
- ------- ------- ------- -------- --------
0.40 0.85 (538) (41.84) 138.71
- ------- ------- ------- -------- --------
10.73 9.40 Income before income taxes 5,808 40.93 32.89
- ------- ------- ------- -------- --------
4.21 3.91 Provision for income taxes 1,944 32.97 30.52
- ------- ------- ------- -------- --------
6.52% 5.49% Net income $ 3,864 46.60% 34.62%
- ------- ------- ------- -------- --------
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
SALES REVENUE:
Consolidated sales revenue for the three and nine months ended September
30, 1996, was $63 million and $186 million compared to $53 million and $151
million, an increase of 19 percent and 23 percent compared to corresponding
periods of 1995, respectively.
Management believes the increase in sales for the three- and nine-month
periods is attributable to the growth of the Company's independent sales
force, increased consumer awareness and interest in natural health and
nutritional products and incentives the Company offers its independent sales
force. Domestic sales revenue was $120 million for the nine months ended
September 30, 1996, an increase of 20 percent compared to the same period in
1995. The domestic sales increase for the three months ended September 30,
1996, was not as robust as in previous quarters. This was due to slower
sales in July and August. The Company's sales revenue growth has been
enhanced through international expansion. The Company's international
operations reported sales revenue of $66 million for the nine months ended
September 30, 1996, an increase of 30 percent compared to the same period in
1995.
The Company's independent sales force consists of Managers and
Distributors. A Distributor interested in earning additional income by
committing more time and effort to selling the Company's products may attain
the rank of "Manager." Appointment as a Manager is dependent upon attaining
certain purchase volume levels and demonstrating leadership abilities. The
number of Managers increased to 15,772 at September 30, 1996, from 11,517 at
September 30, 1995. The number of Distributors at September 30, 1996, was
528,882 compared to 325,711 at September 30, 1995.
12
VOLUME INCENTIVES:
The dollar increase in volume incentives, for the three and nine months
ended September 30, 1996, is directly related to the increase in sales
revenue. Volume incentives are an integral part of the Company's direct sales
marketing program and are payments to independent sales force members for
reaching certain levels of sales performance and organizational development.
Volume incentives vary slightly, on a percentage basis, by product due to the
Company's pricing policies.
Management expects volume incentives to remain relatively constant, as a
percent of sales, during the rest of 1996.
COST OF GOODS SOLD:
The Company has experienced a decrease in cost of goods sold of .70
percent and 1.14 percent, as a percentage of sales, for the three and nine
months ended September 30, 1996, respectively, compared to the same period
last year. The decrease in cost of goods sold, as a percentage of sales, was
primarily related to increased efficiencies in the Company's manufacturing
operations. Management expects cost of goods sold to decrease slightly as a
percent of sales during the rest of 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The Company experienced a decrease in selling, general and administrative
expenses (SG&A) of .67 percent and .82 percent, as a percent of sales, during
the three and nine months ended September 30, 1996, respectively, compared to
the corresponding periods of 1995.
The decrease in SG&A expenses, as a percentage of sales, resulted from
the increase in sales revenue and improved budgetary controls and efforts to
reduce dollar increases in SG&A. Management expects SG&A to decrease
slightly, as a percentage of sales, during the rest of 1996.
13
SUBSIDIARY OPERATIONS:
Segment information for the nine months ended September 30, 1996, compared
to the previous year are as follows:
(Dollars in Thousands)
SALES REVENUE (Unaudited)
1996 1995
---- ----
DOMESTIC SALES REVENUE $120,368 $100,172
-------- --------
INTERNATIONAL SALES REVENUE:
Americas 52,230 38,837
Asia Pacific 10,173 8,320
Other 3,554 3,622
-------- --------
TOTAL INTERNATIONAL 65,957 50,779
-------- --------
TOTAL SALES REVENUE $186,325 $150,951
-------- --------
-------- --------
(Dollars in Thousands)
OPERATING INCOME (Unaudited)
1996 1995
---- ----
DOMESTIC OPERATING INCOME $12,669 $ 8,836
------- -------
INTERNATIONAL OPERATING INCOME:
Americas 6,521 4,669
Asia Pacific (13) (1,101)
Other 72 499
------- -------
TOTAL INTERNATIONAL 6,580 4,067
------- -------
TOTAL OPERATING INCOME $19,249 $12,903
------- -------
------- -------
14
(Dollars in Thousands)
(Unaudited)
ASSETS September 30 December 31
1996 1995
---- ----
DOMESTIC ASSETS $55,017 $40,996
------- -------
INTERNATIONAL ASSETS:
Americas 27,919 18,941
Asia Pacific 4,445 4,239
Other 968 1,071
------- -------
TOTAL INTERNATIONAL 33,332 24,251
------- -------
TOTAL ASSETS $88,349 $65,247
------- -------
------- -------
BALANCE SHEET
ACCOUNTS RECEIVABLE
Accounts receivable increased approximately $1.8 million during the nine
months ended September 30, 1996. The increase in receivables is related to
the Company's growing international operations.
INVENTORIES
Inventories increased $1.7 million during the nine months ended
September 30, 1996. The increase is the result of an effort to increase
inventory levels for certain of the Company's subsidiaries, which are
experiencing substantial sales revenue growth.
PREPAID EXPENSES AND OTHER
Prepaid expenses and other increased approximately $5.5 million during
the nine months ended September 30, 1996. The increase is the result of
deposits made for the Company's travel incentive programs as well as required
tax deposits.
15
ACCRUED VOLUME INCENTIVES
Accrued volume incentives increased approximately $2.2 million during the
first nine months of the year as a direct result of increased sales revenue.
ACCRUED LIABILITIES
The balance of accrued liabilities increased approximately $3.8 million
during the nine months ended September 30, 1996. The increase in accrued
liabilities reflects the increased level of sales revenue and related
accruals for incentives such as conventions and other travel awards.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased approximately $8.4 million for the
nine months ended September 30, 1996. The increase in cash and cash
equivale