- - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (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, 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 (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, 1997, was 18,694,698. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Amounts In Thousands) (Unaudited) September 30 December 31 1997 1996 ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $26,973 $27,879 Accounts receivable, net 9,305 6,698 Inventories 21,473 24,459 Prepaid expenses and other 9,704 8,014 ------- ------- Total Current Assets 67,455 67,050 PROPERTY, PLANT AND EQUIPMENT, net 20,947 20,197 LONG-TERM INVESTMENTS 2,963 2,048 OTHER ASSETS 2,746 2,701 ------- ------- $94,111 $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) September 30 December 31 1997 1996 ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt $ 2,742 $ 2,788 Accounts payable 4,833 4,225 Accrued volume incentives 10,665 8,729 Accrued liabilities 9,899 9,992 Income taxes payable 2,787 1,756 -------- ------- Total Current Liabilities 30,926 27,490 -------- ------- DEFERRED INCOME TAXES 1,381 1,343 -------- ------- SHAREHOLDERS' EQUITY: Common stock, no par value, 20,000 shares authorized; 19,446 shares issued 37,838 39,406 Retained earnings 46,343 33,549 Treasury stock, at cost, 1,022 and 344 shares at September 30, 1997 and December 31, 1996, respectively (17,625) (5,868) Receivables due from related parties (80) (84) Cumulative translation adjustments (4,672) (3,840) -------- ------- Total Shareholders' Equity 61,804 63,163 -------- ------- $ 94,111 $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) (Unaudited) Three Months Ended September 30 -------------------- 1997 1996 ------- ------- SALES REVENUE $71,589 $63,031 ------- ------- COSTS AND EXPENSES: Cost of goods sold 12,756 11,201 Volume incentives 33,424 28,976 Selling, general and administrative 17,272 16,009 ------- ------- 63,452 56,186 ------- ------- OPERATING INCOME 8,137 6,845 ------- ------- OTHER INCOME (EXPENSE): Interest and other income 814 504 Interest expense (119) (14) Foreign exchange loss, net (130) (42) Minority interest 118 (129) ------- ------- 683 319 ------- ------- INCOME BEFORE INCOME TAXES 8,820 7,164 PROVISION FOR INCOME TAXES 3,414 2,626 ------- ------- NET INCOME $ 5,406 $ 4,538 ------- ------- ------- ------- NET INCOME PER COMMON SHARE $ 0.29 $ 0.23 ------- ------- ------- ------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 18,850 19,749 ------- ------- ------- ------- 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) (Unaudited) Nine Months Ended September 30 ----------------------- 1997 1996 -------- -------- SALES REVENUE $210,825 $186,325 -------- -------- COSTS AND EXPENSES: Cost of goods sold 38,222 33,150 Volume incentives 98,146 85,623 Selling, general and administrative 51,943 48,303 -------- -------- 188,311 167,076 -------- -------- OPERATING INCOME 22,514 19,249 -------- -------- OTHER INCOME (EXPENSE): Interest and other income 1,840 1,561 Interest expense (141) (51) Foreign exchange loss, net (248) (410) Minority interest 265 (352) -------- -------- 1,716 748 -------- -------- INCOME BEFORE INCOME TAXES 24,230 19,997 PROVISION FOR INCOME TAXES 9,567 7,841 -------- -------- NET INCOME $ 14,663 $ 12,156 -------- -------- -------- -------- NET INCOME PER COMMON SHARE $ 0.77 $ 0.62 -------- -------- -------- -------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 19,051 19,681 -------- -------- -------- -------- 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) (Unaudited) Nine Months Ended September 30 ------------------- 1997 1996 -------- -------- Increase (Decrease) in Cash and Cash Equivalents CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from sales revenue $207,933 $184,014 Cash paid as volume incentives (96,211) (83,442) Cash paid to suppliers and employees (85,518) (83,067) Interest paid (141) (51) Interest received 1,876 1,632 Income taxes paid (8,498) (7,299) -------- -------- Net Cash Provided by Operating Activities 19,441 11,787 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,709) (8,607) Purchase of other assets (646) (135) Payments received on long-term receivables 341 172 Short-term related party receivables, net 4 246 Minority interest elimination 156 --- (Purchase)/Sale of long-term investments (915) 291 -------- -------- Net Cash Used in Investing Activities (4,769) (8,033) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Tax benefit from exercise of stock options 1,436 4,606 Proceeds from exercise of stock options 4,395 3,215 Payment of cash dividends (1,868) (1,872) Purchase of treasury stock (19,186) (1,689) (Payments of)/Proceeds from short-term debt, net (46) 531 Issuance of treasury stock 30 35 -------- -------- Net Cash Provided by (Used in) Financing Activities (15,239) 4,826 -------- -------- EFFECT OF EXCHANGE RATES ON CASH (339) (159) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (906) 8,421 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,879 14,172 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,973 $ 22,593 -------- -------- -------- -------- 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) (Unaudited) Nine Months Ended September 30 -------------------- 1997 1997 ------- ------- NET INCOME $14,663 $12,156 ------- ------- Depreciation and amortization 3,363 2,512 Bad debt expense 65 78 Increase in accounts receivable, net (2,673) (1,908) Decrease (increase) in inventories 2,986 (1,710) Increase in prepaid expenses and other (1,990) (5,553) Increase in income taxes payable 1,031 485 Increase in accrued liabilities and volume incentives 1,843 5,943 Increase (decrease) in accounts payable 608 (617) Increase in deferred income taxes 37 57 Cumulative translation adjustments (492) 344 ------- ------- Total Adjustments 4,778 (369) ------- ------- Net Cash Provided by Operating Activities $19,441 $11,787 ------- ------- ------- ------- 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, 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 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 1997 1996 ------------ ----------- Raw materials $ 7,190 $ 7,554 Work in process 1,043 1,146 Finished goods 13,240 15,759 ------- ------- $21,473 $24,459 ------- ------- ------- ------- 8 (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 nine month periods ended September 30, 1997 and 1996. As of September 30, 1997, the Company had a total of 1,686,863 options outstanding. The options were all granted at market prices, with a weighted average exercise price of $11.34. 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 37 consecutive quarterly cash dividends. The most recent quarterly cash dividend of 3 1/3 cents per common share was declared on November 3, 1997, to shareholders of record on November 17, payable November 25, 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) Income and Expense (ii) Items as a Percent of Sales Three Months Ended September 30 --------------------------- 1997 to 1996 Three Months Ended ------------------------------- September 30 Amount of Percent --------------------------- Income and Increase/ of 1997 1996 Expense Items (Decrease) Change ------- ------- ------------- ---------- -------- 100.00% 100.00% Sales revenue $8,558 13.58% ------ ------ ------ ------- 17.82 17.77 Cost of sales 1,555 13.89 46.69 45.97 Volume incentives 4,448 15.35 24.12 25.40 SG&A expenses 1,263 7.89 ------ ------ ------ ------- 88.63 89.14 7,266 12.93 ------ ------ ------ ------- 11.37 10.86 Operating income 1,292 18.87 ------ ------ ------ ------- 1.14 0.80 Interest and other income 310 61.47 (0.17) (0.02) Interest expense (105) (747.46) (0.18) (0.07) Foreign exchange gain (loss) (88) (210.14) 0.16 (0.20) Minority interest 247 191.11 ------ ------ ------ ------- 0.95 0.51 364 114.25 ------ ------ ------ ------- 12.32 11.37 Income before income taxes 1,656 23.12 4.77 4.17 Provision for income taxes 788 30.00 ------ ------ ------ ------- 7.55% 7.20% Net income $ 868 19.13% ------ ------ ------ ------- ------ ------ ------ -------
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) Income and Expense (ii) Items as a Percent of Sales Nine Months Ended September 30 --------------------------- 1997 to 1996 Nine Months Ended ------------------------------ September 30 Amount of Percent --------------------------- Income and Increase/ of 1997 1996 Expense Items (Decrease) Change ------- ------- ------------- ---------- -------- 100.00% 100.00% Sales revenue $24,500 13.15% ------ ------ ------- ------- 18.13 17.79 Cost of sales 5,072 15.30 46.55 45.96 Volume incentives 12,523 14.63 24.64 25.92 SG&A expenses 3,640 7.54 ------ ------ ------- ------- 89.32 89.67 21,235 12.71 ------ ------ ------- ------- 10.68 10.33 Operating income 3,265 16.96 ------ ------ ------- ------- 0.87 0.84 Interest and other income 279 17.87 (0.07) (0.03) Interest expense (90) (176.47) (0.12) (0.22) Foreign exchange gain (loss) 162 39.51 0.13 (0.19) Minority interest 617 175.28 ------ ------ ------- ------- 0.81 0.40 968 129.41 ------ ------ ------- ------- 11.49 10.73 Income before income taxes 4,233 21.17 4.53 4.21 Provision for income taxes 1,726 22.01 ------ ------ ------- ------- 6.96% 6.52% Net income $ 2,507 20.62% ------ ------ ------- ------- ------ ------ ------- -------
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, 1997, was $71.6 million and $210.8 million compared to $63.0 million and $186.3 million, an increase of 14 percent and 13 percent compared to corresponding periods of 1996, 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 $133.8 million for the nine months ended September 30, 1997, an increase of 11 percent compared to the same period in 1996. The Company's sales revenue growth has been enhanced through international expansion. The Company's international operations reported sales revenue of $77.0 million for the nine months ended September 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 increased to 14,417 at September 30, 1997, compared to 11,694 at December 31, 1996, an increase of 23 percent. The number of Distributors increased to 624,000 at September 30, 1997, compared to 522,000 at December 31, 1996, an increase of 19 percent. 12 COST OF GOODS SOLD: The Company experienced a slight increase in cost of goods sold, as a percentage of sales, for the three and nine months ended September 30, 1997, compared to the same periods last year. The increase in cost of goods sold, as a percentage of sales, was primarily related to certain of the Company's international operations. Management expects cost of goods sold to remain relatively constant as 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 nine months ended September 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 nine months ended September 30, 1997, compared to the same periods last year. The increase is related to certain of the Company's international operations. Management expects volume incentives to remain relatively constant, as a percent of sales, during the rest of 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: The Company experienced a decrease in selling, general and administrative expenses (SG&A) of 1.3 percent, as a percent of sales, during the three and nine months ended September 30, 1997, respectively, compared to the corresponding periods of 1996. 13 The decrease in SG&A expenses, as a percentage of sales, resulted from the increase in sales revenue and focused management efforts to reduce dollar increases in SG&A. Management expects SG&A to decrease slightly, as a percentage of sales, during the rest of 1997. SUBSIDIARY OPERATIONS: Segment information for the nine months ended September 30, 1997, compared to the previous year are as follows: (Dollars in Thousands) SALES REVENUE (Unaudited) 1997 1996 -------- -------- DOMESTIC SALES REVENUE $133,805 $120,368 -------- -------- INTERNATIONAL SALES REVENUE: Americas 65,183 52,230 Asia Pacific 8,643 10,173* Other 3,194 3,554 -------- -------- TOTAL INTERNATIONAL 77,020 65,957 -------- -------- TOTAL SALES REVENUE $210,825 $186,325 -------- -------- -------- -------- *Includes sales revenue of approximately $1.5 million from a subsidiary which was sold in 1996. (Dollars in Thousands) OPERATING INCOME (Unaudited) 1997 1996 -------- -------- DOMESTIC OPERATING INCOME $17,947 $12,669 -------- -------- INTERNATIONAL OPERATING INCOME: Americas 4,693 6,521 Asia Pacific (578) (13) Other 452 72 -------- -------- TOTAL INTERNATIONAL 4,567 6,580 -------- -------- TOTAL OPERATING INCOME $22,514 $19,249 -------- -------- -------- -------- 14 (Dollars in Thousands) (Unaudited) ASSETS September 30 December 31 1997 1996 ------------ ----------- DOMESTIC ASSETS $54,820 $58,674 ------- ------- INTERNATIONAL ASSETS: Americas 32,841 28,764 Asia Pacific 5,774 3,767 Other 676 791 ------- ------- TOTAL INTERNATIONAL 39,291 33,322 ------- ------- TOTAL ASSETS $94,111 $91,996 ------- ------- ------- ------- LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased approximately $900,000 for the nine months ended September 30, 1997. The decrease in cash and cash equivalents is primarily the result of the Company's ongoing stock buyback program. The Company recently announced a new stock buyback program, which authorized the purchase of 500,000 shares. During the three months ended September 30, 1997, the Company acquired 196,000 shares under the new program. The Company has acquired 1,108,500 shares, or approximately $19.2 million of treasury stock, during the first nine months of 1997. Management believes the Company's stock is an attractive investment and, from time to time, may utilize a portion of its available cash to purchase Company stock in the open market should market conditions warrant. The Company acquired approximately $3.7 million in machinery, equipment and building improvements during the first nine months of 1997 to improve its manufacturing and administrative 15 capabilities. Approximately $1.9 million was used for the payment of dividends during the first nine months. The Company has established a new international subsidiary in South Korea. Management believes that this new operation may require additional funding of $.5 million to $1.0 million. The Company is expanding its domestic manufacturing and inventory facilities. Management expects the cost of these projects to be in the range of $6.0 million to $7.0 million. The Company may consider long-term financing for these projects. From time to time, the Company is subject to various lawsuits or changes in governmental regulations which are incidental to the Company's business and/or the markets in which it operates. 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. 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 funds the capital projects mentioned above from working capital. 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. October 31, 1997 /s/ Daniel P. Howells -------------------------------------------------------- Daniel P. Howells, President and Chief Executive Officer October 31, 1997 /s/ Douglas Faggioli -------------------------------------------------------- Douglas Faggioli, Chief Financial Officer 17