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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 June 30, 1997
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
(Address of Principal Executive Offices)
(801) 342-4407
(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 July
31, 1997, was 18,474,252.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts In Thousands)
(Unaudited)
June 30 December 31
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $28,861 $27,879
Accounts receivable, net 9,616 6,698
Inventories 20,625 24,459
Prepaid expenses and other 7,922 8,014
------- -------
Total Current Assets 67,024 67,050
PROPERTY, PLANT AND
EQUIPMENT, net 20,125 20,197
LONG-TERM INVESTMENTS 1,982 2,048
OTHER ASSETS 2,676 2,701
------- -------
$91,807 $91,996
======= =======
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)
(Amounts In Thousands)
(Unaudited)
June 30 December 31
1997 1996
----------- -----------
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Short-term debt $ 2,896 $ 2,788
Accounts payable 5,286 4,225
Accrued volume incentives 10,660 8,729
Accrued liabilities 10,822 9,992
Income taxes payable 2,741 1,756
------- -------
Total Current Liabilities 32,405 27,490
------- -------
DEFERRED INCOME TAXES 1,390 1,343
------- -------
SHAREHOLDERS' EQUITY:
Common stock, no par value,
20,000 shares authorized;
19,446 shares issued 38,811 39,406
Retained earnings 41,553 33,549
Treasury stock, at cost, 1,073 and 344
shares at June 30, 1997 and
December 31, 1996, respectively (18,148) (5,868)
Receivables due from related parties (81) (84)
Cumulative translation adjustments (4,123) (3,840)
------- -------
Total Shareholders' Equity 58,012 63,163
------- -------
$91,807 $91,996
======= =======
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
June 30
--------------------------
(Unaudited)
1997 1996
------- -------
SALES REVENUE $71,411 $63,182
------- -------
COSTS AND EXPENSES:
Cost of goods sold 13,405 11,565
Volume incentives 33,319 28,750
Selling, general and administrative 16,720 15,542
------- -------
63,444 55,857
------- -------
OPERATING INCOME 7,967 7,325
------- -------
OTHER INCOME (EXPENSE):
Interest and other income 559 313
Interest expense (11) (6)
Foreign exchange gain (loss) 48 (162)
Minority interest 76 (218)
------- -------
672 (73)
------- -------
INCOME BEFORE INCOME TAXES 8,639 7,252
PROVISION FOR INCOME TAXES 3,392 2,910
------- -------
NET INCOME $ 5,247 $ 4,342
======= =======
NET INCOME PER COMMON SHARE $ 0.28 $ 0.22
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 18,947 19,834
======= =======
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)
Six Months Ended
June 30
--------------------------
(Unaudited)
1997 1996
-------- --------
SALES REVENUE $139,236 $123,295
-------- --------
COSTS AND EXPENSES:
Cost of goods sold 25,465 21,949
Volume incentives 64,723 56,646
Selling, general and administrative 34,671 32,295
-------- --------
124,859 110,890
-------- --------
OPERATING INCOME 14,377 12,405
-------- --------
OTHER INCOME (EXPENSE):
Interest and other income 1,026 1,057
Interest expense (22) (38)
Foreign exchange loss (118) (369)
Minority interest 147 (223)
-------- --------
1,033 427
-------- --------
INCOME BEFORE INCOME TAXES 15,410 12,832
PROVISION FOR INCOME TAXES 6,154 5,214
-------- --------
NET INCOME $ 9,256 $ 7,618
======== ========
NET INCOME PER COMMON SHARE $ 0.48 $ 0.39
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,152 19,661
======== ========
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
Increase in Cash and Cash Equivalents
(Amounts In Thousands)
Six Months Ended
June 30
-----------------------
(Unaudited)
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales revenue $136,164 $121,832
Cash paid as volume incentives (62,791) (53,898)
Cash paid to suppliers and employees (52,147) (53,081)
Interest paid (23) (38)
Interest received 1,062 1,123
Income taxes paid (5,121) (4,827)
-------- --------
Net Cash Provided by Operating Activities 17,144 11,111
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,859) (4,067)
Sale of long-term investments, net 66 73
Payments received on long-term receivables 104 110
Payments received on related party receivables 2 201
Purchase of other assets (392) (156)
Minority interest elimination 76 --
-------- --------
Net Cash Used in Investing Activities (2,003) (3,839)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividends (1,252) (1,242)
Purchase of treasury stock (14,447) --
Proceeds from short-term debt 108 433
Proceeds from exercise of stock options 1,148 1,915
Tax benefit from exercise of stock options 415 --
Issuance of treasury stock 9 6
-------- --------
Net Cash (Used in)/ Provided By
Financing Activities (14,019) 1,112
-------- --------
EFFECT OF EXCHANGE RATES ON CASH (140) (203)
-------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 982 8,181
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 27,879 14,172
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 28,861 $ 22,353
======== ========
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
(Amounts In Thousands)
Six Months Ended
June 30
------------------
(Unaudited)
1997 1996
------- -------
NET INCOME $ 9,256 $ 7,618
------- -------
Bad debt expense 97 36
Depreciation and amortization 2,243 1,729
Increase in accounts receivable (3,015) (1,065)
Decrease (increase) in inventories 3,835 (718)
Decrease (increase) in prepaid
expenses & other assets 17 (2,357)
Increase in income taxes payable 985 331
Increase in accrued liabilities
and volume incentives 2,762 5,698
Increase (decrease) in accounts payable 1,061 (491)
Increase in deferred income taxes 46 57
Cumulative translation adjustments (143) 273
------- -------
Total Adjustments 7,888 3,493
------- -------
Net Cash Provided by Operating Activities $17,144 $11,111
======= =======
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
(Amounts In Thousands, Except Per-Share Information)
(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 present fairly the
financial position as of June 30, 1997, 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.
It is suggested that these consolidated condensed financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's latest Annual Report on Form 10-K.
(2) INVENTORIES
Inventories consist of:
(Unaudited)
June 30 December 31
1997 1996
----------- -----------
Raw materials $ 6,484 $ 7,554
Work in process 1,048 1,146
Finished goods 13,093 15,759
------- -------
$20,625 $24,459
======= =======
8
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(3) EARNINGS PER SHARE
Outstanding stock options are considered common stock equivalents and are
included in the computation of primary earnings per share for the three- and
six-month periods ended June 30, 1997 and 1996.
As of June 30, 1997, the Company had a total of 2,419,609 options
outstanding. The options were all granted at market prices, with a weighted
average exercise price of $13.06.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128 effective for years beginning after December
15, 1996. This statement, which is expected to increase earnings per share when
implemented, is not expected to have a material effect on the Company's
consolidated financial statements.
(4) QUARTERLY CASH DIVIDENDS
The Company has declared 36 consecutive quarterly cash dividends. The most
recent quarterly cash dividend of 3 1/3 cents per common share was declared
August 1, 1997, to shareholders of record on August 12, 1997, payable August 19,
1997.
(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 June 30
Items as a Percent of Sales --------------------------
- --------------------------- 1997 to 1996
Three Months Ended --------------------------
June 30 Amount of Percent
- --------------------------- Income and Increase/ of
1997 1996 Expense Items (Decrease) Change
- -------- ------- ---------------- ---------- ---------
100.00% 100.00% Sales revenue $8,229 13.02%
------ ------ ------ --------
18.77 18.30 Cost of sales 1,840 15.91
46.66 45.51 Volume incentives 4,569 15.89
23.41 24.60 SG&A expenses 1,178 7.58
------ ------ ------ --------
88.84 88.41 7,587 13.58
------ ------ ------ --------
11.16 11.59 Operating income 642 8.76
------ ------ ------ --------
0.78 0.50 Interest and other income 246 78.68
(0.02) (0.01) Interest expense (5) (83.58)
0.07 (0.26) Foreign exchange gain (loss) 210 129.70
0.11 (0.34) Minority interest 294 134.66
------ ------ ------ --------
0.94 (0.11) 745 1,020.42
------ ------ ------ --------
12.10 11.48 Income before income taxes 1,387 19.12
4.75 4.61 Provision for income taxes 482 16.58
------ ------ ------ --------
7.35% 6.87% Net income $ 905 20.83%
====== ====== ====== ========
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 Six Months Ended June 30
Items as a Percent of Sales --------------------------
- --------------------------- 1997 to 1996
Six Months Ended --------------------------
June 30 Amount of Percent
- --------------------------- Income and Increase/ of
1997 1996 Expense Items (Decrease) Change
- -------- ------- ---------------- ---------- ---------
100.00% 100.00% Sales revenue $15,941 12.93%
------ ------ ------ --------
18.29 17.80 Cost of sales 3,516 16.02
46.48 45.95 Volume incentives 8,077 14.26
24.90 26.19 SG&A expenses 2,376 7.36
------ ------ ------ --------
89.67 89.94 13,969 12.60
------ ------ ------ --------
10.33 10.06 Operating income 1,972 15.90
------ ------ ------ --------
0.74 0.86 Interest and other income (31) (2.93)
(0.02) (0.03) Interest expense 16 42.11
(0.08) (0.30) Foreign exchange gain (loss) 251 68.02
0.10 (0.18) Minority interest 370 165.92
------ ------ ------ --------
0.74 0.35 606 141.92
------ ------ ------ --------
11.07 10.41 Income before income taxes 2,578 20.09
4.42 4.23 Provision for income taxes 940 18.03
------ ------ ------ --------
6.65% 6.18% Net income $ 1,638 21.50%
====== ====== ====== ========
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
SALES REVENUE:
The Company reported record consolidated sales for the three and six months
ended June 30, 1997. Sales revenue for the three and six months ended June 30,
1997, was $71 million and $139 million compared to $63 million and $123 million
in the same period the prior year, an increase of 13 percent compared to both
corresponding periods of 1996, respectively.
Management believes the increase in sales for the three- and six-month
periods is attributable to the expansion of the Company's independent sales
force, a continued increase of consumer awareness and interest in natural
health and nutritional products and incentives the Company offers its
independent sales force. In addition, the Company's sales revenue growth has
been enhanced by its international expansion. The Company's international
operations reported sales revenue of $50 million for the six months ended June
30, 1997, an increase of 17 percent compared to the same period in 1996.
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 was
14,975 at June 30, 1997, and 11,694 at December 31, 1996. The number of
Distributors as of June 30, 1997, was approximately 572,000 compared to 522,000
at December 31, 1996.
COST OF GOODS SOLD:
The Company experienced an increase in cost of goods sold of .47 percent
and .49 percent, as a percent of sales, for the three and six months ended
June 30, 1997, respectively, compared to the same periods last year. The
increase in cost of goods sold, as a percentage of sales, was primarily
12
related to certain of the Company's international operations. Management
expects cost of goods sold to decrease slightly as a percent of sales during
the rest of 1997.
VOLUME INCENTIVES:
The dollar increase in volume incentives, as a percent of sales, for the
three and six months ended June 30, 1997, 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. Volume incentives increased
slightly, as a percent of sales, for the three and six months ended June 30,
1997, compared to the same period last year. The increase is related to
certain of the Company's international operations.
Management expects volume incentives to decrease slightly, as a percent of
sales, during the rest of 1997. The decrease is anticipated as the result of
increasing sales from certain of the Company's international operations, which
have comparatively lower volume incentive payments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The Company experienced a decrease in selling, general and administrative
expenses (SG&A) of 1.19 percent and 1.29 percent, as a percent of sales, during
the three and six month periods ended June 30, 1997, respectively, compared
to the corresponding periods of 1996.
The decrease in SG&A expenses, as a percent of sales, resulted from
efficiencies due to the increase in sales revenue and increased budgetary
controls and efforts to reduce dollar increases in SG&A. Management expects
SG&A to decrease slightly, as a percent of sales, during the rest of 1997.
13
SUBSIDIARY OPERATIONS:
Segment information for the six months ended June 30, 1997, compared to the
previous year are as follows:
SALES REVENUE
SALES REVENUE (Dollars in Thousands)
(Unaudited)
1997 1996
-------- --------
DOMESTIC SALES REVENUE $ 89,474 $ 80,777
-------- --------
INTERNATIONAL SALES REVENUE:
Americas 41,995 33,308
Asia Pacific 5,633 6,716
Other 2,134 2,494
-------- --------
TOTAL INTERNATIONAL 49,762 42,518
-------- --------
TOTAL SALES REVENUE $139,236 $123,295
======== ========
OPERATING INCOME (Dollars in Thousands)
(Unaudited)
1997 1996
-------- --------
DOMESTIC OPERATING INCOME $ 11,114 $ 7,814
-------- --------
INTERNATIONAL OPERATING INCOME:
Americas 3,171 4,477
Asia Pacific (171) 7
Other 263 107
-------- --------
TOTAL INTERNATIONAL 3,263 4,591
-------- --------
TOTAL OPERATING INCOME $ 14,377 $ 12,405
======== ========
(Dollars in Thousands)
(Unaudited)
June 30 December 31
ASSETS 1997 1996
-------- ----------
DOMESTIC ASSETS $ 54,202 $ 58,674
-------- --------
INTERNATIONAL ASSETS:
Americas 32,458 28,764
Asia Pacific 4,443 3,767
Other 704 791
-------- --------
TOTAL INTERNATIONAL 37,605 33,322
-------- --------
TOTAL ASSETS $ 91,807 $ 91,996
======== ========
14
BALANCE SHEET
ACCOUNTS RECEIVABLE
Accounts receivable increased approximately $3 million during the six months
ended June 30, 1997. The increase in receivables is related to the Company's
growing international operations.
INVENTORIES
Inventories decreased approximately $4 million during the six months ended
June 30, 1997. The decrease results from a concerted effort to reduce excess
safety stocks and improve inventory management.
ACCRUED VOLUME INCENTIVES
Accrued volume incentives increased approximately $2 million during the
first six months of the year as a direct result of increased sales revenue.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased approximately $1 million for the six
months ended June 30, 1997. The increase in cash is primarily the result of the
increased sales and income as well as increases in current liabilities.
Management believes the Company's stock is an attractive investment and
pursuant to its recently announced 500,000 share stock buyback program, may
utilize some of its available cash to purchase stock as market conditions
warrant. During the first six months of 1997, the Company acquired $14 million,
or approximately 878,000 shares, of treasury stock as part of the previous
buyback programs.
The Company is in the process of establishing a new international
subsidiary. Management expects that this new operation may require initial
capitalization of approximately $1.2 million during the next nine to fifteen
months.
15
The Company is expanding its domestic manufacturing and inventory
facilities. Management expects the cost of these projects to be in the range of
$6.5 million to $7.5 million. The Company may consider long-term financing for
these projects.
The Company is a defendant in various lawsuits which are incidental to the
Company's business. Management, after consultation with its legal counsel,
believes that any liability as a result of these matters should not have a
material effect upon the Company's results of operations or financial position.
On August 4, 1997, the United Parcel Service (UPS) truck drivers went out on
strike. The Company's domestic distributor orders are delivered by UPS. The
impact, to the Company, of the UPS strike is currently not determinable.
Management is proceeding with alternate plans, which may have an impact on both
cost and delivery times.
Management believes that future working capital requirements can be
satisfied by cash, which is generated by the Company's operating activities.
Management expects cash and investments to increase during 1997, as the result
of operations. However, cash and investments may be reduced in the event the
Company proceeds with the capital projects mentioned above.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company has included forward-looking statements concerning its business
and operations in this Form 10-Q. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those projected.
16
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) No exhibits are required to be filed by Item 601 of Regulation S-K.
b) No reports were filed on Form 8-K during the quarter for which this
report is filed.
OTHER ITEMS
There were no other items to be reported under Part II of this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATURE'S SUNSHINE PRODUCTS, INC.
Date: August 7, 1997 /s/ Kristine F. Hughes
-----------------------------------------
Kristine F. Hughes, President &
Chief Executive Officer
Date: August 7, 1997 /s/ Douglas Faggioli
-----------------------------------------
Douglas Faggioli, Chief Financial Officer
17