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, 2013

 

OR

 

o

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

 

For the transition period from                          to                         .

 

Commission File Number:  0-8707

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

Utah

 

87-0327982

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

2500 West Executive Parkway, Suite 100

Lehi, Utah 84043

(Address of principal executive offices and zip code)

 

(801) 341-7900

(Registrant’s telephone number including area code)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares of Common Stock, no par value, outstanding on July 26, 2013 was 15,980,249 shares.

 

 

 



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended June 30, 2013

 

Table of Contents

 

Part I. Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Comprehensive Income

4

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

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

18

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

 

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

38

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

38

 

 

 

 

 

Item 4.

Mine Safety Disclosures

38

 

 

 

 

 

Item 5.

Other Information

38

 

 

 

 

 

Item 6.

Exhibits

38

 

2



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,
2013

 

December 31,
2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

87,295

 

$

79,241

 

Accounts receivable, net of allowance for doubtful accounts of $671 and $631, respectively

 

9,104

 

9,614

 

Investments available for sale

 

2,018

 

2,071

 

Inventories

 

41,674

 

43,280

 

Deferred income tax assets

 

5,233

 

5,307

 

Prepaid expenses and other

 

6,378

 

5,820

 

Total current assets

 

151,702

 

145,333

 

 

 

 

 

 

 

Property, plant and equipment, net

 

28,155

 

27,950

 

Investment securities

 

1,151

 

1,276

 

Intangible assets, net

 

928

 

1,002

 

Deferred income tax assets

 

11,385

 

11,516

 

Other assets

 

6,372

 

6,842

 

 

 

$

199,693

 

$

193,919

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5,044

 

$

6,226

 

Accrued volume incentives

 

19,541

 

18,130

 

Accrued liabilities

 

27,702

 

27,302

 

Deferred revenue

 

3,410

 

4,311

 

Current installments of long-term debt

 

3,371

 

3,350

 

Income taxes payable

 

2,349

 

2,071

 

Total current liabilities

 

61,417

 

61,390

 

 

 

 

 

 

 

Liability related to unrecognized tax benefits

 

10,797

 

10,571

 

Long-term debt

 

858

 

2,270

 

Deferred compensation payable

 

1,151

 

1,276

 

Other liabilities

 

2,698

 

2,776

 

Total long-term liabilities

 

15,504

 

16,893

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value, 50,000 shares authorized, 15,962 and 15,810 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively

 

80,578

 

77,292

 

Retained earnings

 

56,656

 

48,910

 

Accumulated other comprehensive loss

 

(14,462

)

(10,566

)

Total shareholders’ equity

 

122,772

 

115,636

 

 

 

$

199,693

 

$

193,919

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3



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,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net sales revenue

 

$

93,675

 

$

92,991

 

Cost of sales

 

(22,630

)

(22,610

)

Gross profit

 

71,045

 

70,381

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Volume incentives

 

34,525

 

33,540

 

Selling, general and administrative

 

28,709

 

26,530

 

Operating income

 

7,811

 

10,311

 

Other income, net

 

1,482

 

165

 

Income before provision for income taxes

 

9,293

 

10,476

 

Provision for income taxes

 

3,241

 

3,190

 

Net income

 

$

6,052

 

$

7,286

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Net income

 

$

0.38

 

$

0.47

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Net income

 

$

0.38

 

$

0.46

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

15,896

 

15,605

 

Weighted average diluted common shares outstanding

 

16,112

 

15,864

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.10

 

$

0.05

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net income

 

$

6,052

 

$

7,286

 

Foreign currency translation loss (net of tax)

 

(2,040

)

(464

)

Net unrealized gains (losses) on investment securities (net of tax)

 

6

 

(23

)

Total comprehensive income

 

$

4,018

 

$

6,799

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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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,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net sales revenue

 

$

190,154

 

$

185,859

 

Cost of sales

 

(47,075

)

(46,339

)

Gross profit

 

143,079

 

139,520

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Volume incentives

 

69,500

 

67,121

 

Selling, general and administrative

 

58,826

 

52,914

 

Operating income

 

14,753

 

19,485

 

Other income, net

 

1,812

 

55

 

Income before provision for income taxes

 

16,565

 

19,540

 

Provision for income taxes

 

5,649

 

5,026

 

Net income

 

10,916

 

14,514

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Net income

 

$

0.69

 

$

0.93

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Net income

 

$

0.68

 

$

0.91

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

15,860

 

15,591

 

Weighted average diluted common shares outstanding

 

16,079

 

15,953

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.20

 

$

0.05

 

 

See accompanying notes to the unaudited 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,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net income

 

$

10,916

 

$

14,514

 

Foreign currency translation loss (net of tax)

 

(3,926

)

(355

)

Net unrealized gains on investment securities (net of tax)

 

30

 

21

 

Total comprehensive income

 

$

7,020

 

$

14,180

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5



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,

 

 

 

2013

 

2012

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

10,916

 

$

14,514

 

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

 

 

 

 

 

Provision for doubtful accounts

 

19

 

19

 

Depreciation and amortization

 

2,181

 

2,015

 

Share-based compensation expense

 

1,930

 

1,321

 

Loss on sale of property and equipment

 

25

 

18

 

Deferred income taxes

 

183

 

(7

)

Amortization of bond discount

 

1

 

3

 

Purchase of trading investment securities

 

(36

)

(37

)

Proceeds from sale of trading investment securities

 

193

 

180

 

Realized and unrealized gains on investments

 

(33

)

(38

)

Foreign exchange (gains) losses

 

(1,583

)

505

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

229

 

(713

)

Inventories

 

1,163

 

(1,158

)

Prepaid expenses and other current assets

 

(642

)

(733

)

Other assets

 

103

 

60

 

Accounts payable

 

(1,296

)

(581

)

Accrued volume incentives

 

1,643

 

220

 

Accrued liabilities

 

699

 

(1,196

)

Deferred revenue

 

(901

)

406

 

Income taxes payable

 

401

 

(4,846

)

Liability related to unrecognized tax benefits

 

216

 

(642

)

Deferred compensation payable

 

(125

)

(83

)

Net cash provided by operating activities

 

15,286

 

9,227

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property, plant and equipment

 

(2,332

)

(2,562

)

Proceeds from sale of property, plant and equipment

 

46

 

22

 

Proceeds from maturity and sale of investments available for sale

 

 

3,574

 

Purchase of investments available for sale

 

(75

)

(178

)

Net cash provided by (used in) investing activities

 

(2,361

)

856

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments of long-term debt

 

(1,391

)

(1,640

)

Dividends paid

 

(3,170

)

(780

)

Proceeds from the exercise of stock options

 

1,356

 

401

 

Net cash used in financing activities

 

(3,205

)

(2,019

)

Effect of exchange rates on cash and cash equivalents

 

(1,666

)

(680

)

Net increase in cash and cash equivalents

 

8,054

 

7,384

 

Cash and cash equivalents at the beginning of the period

 

79,241

 

58,969

 

Cash and cash equivalents at the end of the period

 

$

87,295

 

$

66,353

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for income taxes

 

$

5,407

 

$

11,132

 

Cash paid for interest

 

32

 

68

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6



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. Nature’s Sunshine Products, Inc. is a Utah corporation with its principal place of business in Lehi, Utah. The Company sells its products to a sales force of independent Managers and Distributors who use the products themselves or resell them to other Distributors or consumers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of the Company’s major product groups are subject to regulation by one or more governmental agencies.

 

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

 

Principles of Consolidation

 

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

 

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

 

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

 

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

 

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

 

The Company re-measures its results in Venezuela at the SICAD rate, which was approximately 6.3 bolivars per U.S. dollar as of June 30, 2013.

 

7



Table of Contents

 

During the three months ended June 30, 2013 and 2012, the Company’s Venezuelan subsidiary’s net sales revenue represented approximately 2.0 percent and 1.8 percent of consolidated net sales revenue, respectively.  During the six months ended June 30, 2013 and 2012, the Company’s Venezuelan subsidiary’s net sales revenue represented approximately 2.1 percent and 1.7 percent of consolidated net sales revenue, respectively.  As of June 30, 2013 and December 31, 2012, the Company’s Venezuelan subsidiary held cash and cash equivalents of $2,611 and $1,748, respectively.  At this time, the Company is not able to reasonably estimate the future state of exchange controls in Venezuela and its availability of U.S. dollars at the official exchange rate or at the SICAD rate.

 

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

 

As of June 30, 2012, Belarus was designated as a highly inflationary economy. Historically, the U.S. dollar has been our 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 our Distributors in this market has diminished. During the three months ended June 30, 2013 and 2012, the Company’s Belarusian subsidiary’s net sales revenue represented approximately 1.9 percent and 1.6 percent of consolidated net sales revenue, respectively. During the six months ended June 30, 2013 and 2012, the Company’s Belarusian subsidiary’s net sales revenue represented approximately 2.1 percent and 1.7 percent of consolidated net sales revenue, respectively.

 

(2)                     Inventories

 

Inventories consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Raw Materials

 

$

11,820

 

$

13,287

 

Work in Progress

 

954

 

742

 

Finished Goods

 

28,900

 

29,251

 

 

 

$

41,674

 

$

43,280

 

 

(3)                     Intangible Assets

 

At June 30, 2013 and December 31, 2012, intangibles for product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $835 and $761, and a net amount of $928 and $1,002, respectively. The estimated useful lives of the product formulations range from 9 to 15 years.

 

Amortization expense for intangible assets for the three months ended June 30, 2013 and 2012 was $37 and $37, respectively. Amortization expense for intangible assets for the six months ended June 30, 2013 and 2012 was $74 and $74, respectively. Estimated amortization expense for each of the three succeeding fiscal years thereafter is $149 followed by two fiscal years with estimated amortization expense of $91.

 

(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, 2013

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

505

 

$

19

 

$

 

$

524

 

U.S. government securities funds

 

995

 

 

(14

)

981

 

Equity securities

 

227

 

288

 

(2

)

513

 

Total short-term investment securities

 

$

1,727

 

$

307

 

$

(16

)

$

2,018

 

 

As of December 31, 2012

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

608

 

$

30

 

$

 

$

638

 

U.S. government securities funds

 

995

 

 

(9

)

986

 

Equity securities

 

227

 

228

 

(8

)

447

 

Total short-term investment securities

 

$

1,830

 

$

258

 

$

(17

)

$

2,071

 

 

The municipal obligations held at a fair value of $524 at June 30, 2013 all mature in less than two years.

 

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During the six month periods ended June 30, 2013 and 2012, the proceeds from the maturities and sales of available-for-sale securities were $0 and $3,574, 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, 2013 and 2012, respectively.

 

The Company’s trading securities portfolio totaled $1,151 at June 30, 2013 and $1,276 at December 31, 2012, and generated losses of $12 and $26 for the three months ended June 30, 2013 and 2012, respectively, and generated gains of $33 and $60 for the six months ended June 30, 2013 and 2012, respectively.

 

As of June 30, 2013 and December 31, 2012, the Company had unrealized losses of $14 and $9, respectively, in its U.S. government securities funds. These losses are due to the interest rate sensitivity of the municipal obligations and the performance of the overall stock market for the equity securities.

 

(5)                     Long-Term Debt

 

On August 9, 2011, the Company entered into a Revolving Credit agreement with Wells Fargo Bank, N.A. that permits the Company to borrow up to $15,000 through August 9, 2014, bearing interest at LIBOR plus 1.25 percent. The Company must pay an annual commitment fee of 0.25 percent on the unused portion of the commitment. At June 30, 2013, the Company had $15,000 available under this facility.

 

On August 8, 2013, the Company renegotiated the Revolving Credit agreement with Wells Fargo Bank, N.A. to increase to borrowing limit to $25,000 and extend the maturity to August 8, 2015.  The Company will pay an annual commitment fee of 0.25 percent on the unused portion of the commitment and LIBOR plus 1.25 percent on any drawings on the agreement.

 

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 June 30, 2013 and December 31, 2012). The term loan is collateralized by the Company’s manufacturing facility in Spanish Fork, Utah.

 

Long-term debt consists of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Term loan in monthly installments of approximately $284, including interest, secured by real estate

 

$

4,229

 

$

5,620

 

Less current installments

 

(3,371

)

(3,350

)

Long-term debt less current installments

 

$

858

 

$

2,270

 

 

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

 

(6)                     Net Income Per Share

 

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

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income

 

$

6,052

 

$

7,286

 

$

10,916

 

$

14,514

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

15,896

 

15,605

 

15,860

 

15,591

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.38

 

$

0.47

 

$

0.69

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

Diluted shares outstanding

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

15,896

 

15,605

 

15,860

 

15,591

 

Weighted average stock options outstanding

 

216

 

259

 

219

 

362

 

Diluted weighted average shares outstanding

 

16,112

 

15,864

 

16,079

 

15,953

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share

 

$

0.38

 

$

0.46

 

$

0.68

 

$

0.91

 

 

 

 

 

 

 

 

 

 

 

Potentially dilutive shares excluded from diluted per share amounts:

 

 

 

 

 

 

 

 

 

Stock options

 

146

 

 

163

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Stock options

 

306

 

217

 

428

 

417

 

 

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

 

(7)                     Capital Transactions

 

Dividends

 

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

 

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

 

On August 8, 2013, the Company’s Board of Directors declared a special one-time cash dividend of $1.50 per common share in addition to the Company’s recurring quarterly dividend of $0.10 per common share that is to be paid on August 29, 2013 to shareholders of record on August 19, 2013. The amount of the cash dividend paid to shareholders is expected to be approximately $25.6 million. In addition, the Board of Directors authorized a $10 million 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 share 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.

 

Share-based Compensation

 

Stock option activity for the six months ended June 30, 2013 is as follows:

 

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Number of
Shares

 

Weighted Average
Exercise
Price Per Share

 

Options outstanding at December 31, 2012

 

1,784

 

$

11.81

 

Granted

 

623

 

15.01

 

Forfeited

 

(35

)

14.67

 

Exercised

 

(149

)

9.11

 

Options outstanding at June 30, 2013

 

2,223

 

12.84

 

 

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

 

During the six-month period ended June 30, 2013, the Company granted options to purchase 623 shares of common stock under the 2012 Stock Incentive Plan to the Company’s executive officers and other employees, which are composed of both time-based stock options and net sales revenue performance-based stock options. These options were issued with a weighted-average exercise price of $15.01 per share and a weighted-average grant date fair value of $6.15 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, 2013:

 

 

 

2013

 

Expected life (in years)

 

5.0 to 6.0

 

Risk-free interest rate

 

0.6 to 0.8

 

Expected volatility

 

56.1 to 58.1

 

Dividend yield

 

2.6 to 2.7

 

 

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

 

Share-based compensation expense from time-based stock options for the three-month periods ended June 30, 2013 and 2012 was approximately $729 and $356, respectively, and the related tax benefit was approximately $288 and $142, respectively. Share-based compensation expense from time-based stock options for the six-month periods ended June 30, 2013 and 2012 was approximately $1,803 and $669, respectively and the related tax benefit was approximately $712 and $267, respectively. As of June 30, 2013 and December 31, 2012, the unrecognized share-based compensation expense related to the grants described above was $4,023 and $2,715, respectively. As of June 30, 2013, the remaining compensation expense is expected to be recognized over the weighted-average period of approximately 2.0 years.

 

Shared-based compensation expense from operating income performance-based stock options for the three-month periods ended June 30, 2013 and 2012 was approximately $0 and $329, respectively, and the related tax benefit was approximately $0 and $127, respectively. Shared-based compensation expense from operating income performance-based stock options for the six-month periods ended June 30, 2013 and 2012 was approximately $0 and $652, respectively, and the related tax benefit was approximately $0 and $255, respectively. As of December 31, 2012, there was no remaining compensation expense to be recognized for the operating income performance-based stock options.

 

The Company has not recognized any share-based compensation expense related to the net sales revenue performance-based stock options for the three and six months ended June 30, 2013.  Should the Company attain all of the net sales revenue metrics related to the net sales revenue performance-based stock option grants, the Company would recognize up to $1,070 of potential share-based compensation expense.

 

At June 30, 2013, the aggregate intrinsic value of outstanding time-based and performance-based stock options to purchase 2,223 shares of common stock, exercisable time-based and performance-based stock options to purchase 1,146 shares of common stock and time-based and performance-based stock options to purchase 868 shares of common stock that are expected to vest (net of expected forfeitures) was $7,801, $6,447 and $1,287, respectively. At December 31, 2012, the aggregate intrinsic value of outstanding options to purchase 1,784 shares of common stock, the exercisable options to purchase 1,011 shares of common stock, and options to purchase 644 shares of common stock expected to vest was $5,315, $5,016 and $281, respectively.

 

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Restricted stock unit activity for the six months ended June 30, 2013 is as follows:

 

 

 

Number of
Shares

 

Weighted Average
Grant Date
Fair Value

 

Units outstanding at December 31, 2012

 

18

 

$

12.07

 

Granted

 

14

 

12.90

 

Issued

 

(3

)

12.07

 

Forfeited

 

 

 

Units outstanding at June 30, 2013

 

29

 

12.47

 

 

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

 

Share-based compensation expense from RSUs for the three and six months ended June 30, 2013 was approximately $52 and $127, respectively, and the related tax benefit was approximately $18 and $44, respectively. As of June 30, 2013 and December 31, 2012, the unrecognized share-based compensation expense related to the grants described above was $155 and $99, respectively. As of June 30, 2013, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 0.9 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 marketing and Distributor compensation plans and products with formulations that are sufficiently different from those of NSP Americas, Asia Pacific and Europe; and NSP Russia, Central and Eastern Europe to warrant accounting for these operations as a separate business segment. Net sales revenues for each segment have been reduced by intercompany sales as they are not included in the measure of segment profit or loss reviewed by the chief executive officer. The Company evaluates performance based on contribution margin by segment before consideration of certain inter-segment transfers and expenses.

 

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

 

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Reportable business segment information is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales revenue:

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe

 

$

53,416

 

$

53,536

 

$

106,553

 

$

107,471

 

NSP Russia, Central and Eastern Europe

 

14,978

 

13,209

 

31,118

 

28,799

 

Synergy WorldWide

 

25,281

 

26,246

 

52,483

 

49,589

 

Total net sales revenue

 

93,675

 

92,991

 

190,154

 

185,859

 

 

 

 

 

 

 

 

 

 

 

Contribution margin (1):

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe

 

22,305

 

21,855

 

44,261

 

43,195

 

NSP Russia, Central and Eastern Europe

 

5,523

 

5,020

 

11,506

 

11,026

 

Synergy WorldWide

 

8,692

 

9,966

 

17,812

 

18,178

 

Total contribution margin

 

36,520

 

36,841

 

73,579

 

72,399

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

28,709

 

26,530

 

58,826

 

52,914

 

Total operating income

 

7,811

 

10,311

 

14,753

 

19,485

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

1,482

 

165

 

1,812

 

55

 

Income before provision for income taxes

 

$

9,293

 

$

10,476

 

$

16,565

 

$

19,540

 

 


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

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales revenue:

 

 

 

 

 

 

 

 

 

United States

 

$

40,195

 

$

40,410

 

$

79,343

 

$

80,147

 

Other

 

53,480

 

52,581

 

110,811

 

105,712

 

 

 

$

93,675

 

$

92,991

 

$

190,154

 

$

185,859

 

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

31,009

 

$

30,278

 

$

61,385

 

$

60,922

 

Vitamin, mineral and other nutritional supplements

 

20,086

 

20,725

 

40,570

 

41,187

 

Personal care products

 

1,353

 

1,579

 

2,607

 

3,301

 

Other products

 

968

 

954

 

1,991

 

2,061

 

 

 

53,416

 

53,536

 

106,553

 

107,471

 

NSP Russia, Central and Eastern Europe:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

6,864

 

$

5,775

 

$

14,036

 

$

12,555

 

Vitamin, mineral and other nutritional supplements

 

7,001

 

5,764

 

14,483

 

12,732

 

Personal care products

 

1,066

 

1,627

 

2,495

 

3,420

 

Other products

 

47

 

43

 

104

 

92

 

 

 

14,978

 

13,209

 

31,118

 

28,799

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

10,149

 

$

11,530

 

$

22,088

 

$

19,977

 

Vitamin, mineral and other nutritional supplements

 

13,426

 

13,028

 

26,758

 

26,065

 

Personal care products

 

1,364

 

1,188

 

2,934

 

2,626

 

Other products

 

342

 

500

 

703

 

921

 

 

 

25,281

 

26,246

 

52,483

 

49,589

 

 

 

$

93,675

 

$

92,991

 

$

190,154

 

$

185,859

 

 

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,
2013

 

December 31,
2012

 

Property, plant and equipment:

 

 

 

 

 

United States

 

$

21,579

 

$

20,923

 

Venezuela

 

3,407

 

3,535

 

Other

 

3,169

 

3,492

 

Total property, plant and equipment

 

$

28,155

 

$

27,950

 

 

(9)                     Income Taxes

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. For the three months ended June 30, 2013 and 2012, the Company’s provision for income taxes, as a percentage of income before income taxes was 34.9 percent and 30.5 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the six months ended June 30, 2013 and 2012, the Company’s provision for income taxes, as a percentage of income before income taxes was 34.1 percent and 25.7 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, 2013 was primarily attributed to an increase in tax liabilities associated with uncertain tax positions (0.6 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-0.6 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended June 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-3.4 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-2.2 percent).

 

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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 (5.3 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-5.6 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the six months ended June 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.4 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.1 percent).

 

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

 

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

 

As of June 30, 2013, the Company had accrued $10,797 related to unrecognized tax positions compared with $10,571 as of December 31, 2012. This net increase was primarily attributed to the increase in transfer pricing contingencies, including anticipated increases in penalties and interest.

 

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

 

(10)             Commitments and Contingencies

 

Legal Proceedings

 

The Company is party to various legal proceedings. 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. Therefore, no provision for losses has been provided. The Company believes future payments related to these matters could range from $0 to approximately $1,000. 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 general liability and excess liability insurance coverage. The Company also maintains product liability insurance through a wholly owned captive insurance company. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to the Company, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.

 

Non-income Tax Contingencies

 

The Company has reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. The Company provides provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters, including value added taxes and sales tax. The Company provides provisions for U.S. state sales taxes in each of the states where the Company has nexus. As of June 30, 2013 and December 31, 2012, accrued liabilities include $5,641 and $6,207, respectively, related to non-income tax contingencies. While management believes that the assumptions and estimates used to determine this liability are reasonable, the ultimate outcome of those matters cannot presently be determined. The Company is not able at this time to predict the ultimate outcomes of those matters or to estimate the effect the ultimate outcomes, if greater than the amounts accrued, would have on the financial condition, results of operations or cash flows of the Company.

 

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Government Regulations

 

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

 

(11)              Fair Value Measurements

 

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

 

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

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

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

 

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

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Total

 

Investments available for sale

 

 

 

 

 

 

 

 

 

Municipal obligations

 

$

 

$

524

 

$

 

$

524

 

U.S. government security funds

 

981

 

 

 

981

 

Equity securities

 

513

 

 

 

513

 

Investment securities

 

1,151

 

 

 

1,151

 

Total assets measured at fair value on a recurring basis

 

$

2,645

 

$

524

 

$

 

$

3,169

 

 

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

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Total

 

Investments available for sale

 

 

 

 

 

 

 

 

 

Municipal obligations

 

$

 

$

638

 

$

 

$

638

 

U.S. government security funds

 

986

 

 

 

986

 

Equity securities

 

447

 

 

 

447

 

Investment securities

 

1,276

 

 

 

1,276

 

Total assets measured at fair value on a recurring basis

 

$

2,709

 

$

638

 

$

 

$

3,347

 

 

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

 

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Level 2 securities include investments in state and municipal obligations whereby all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.

 

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

 

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

 

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

 

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

 

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

 

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

 

OVERVIEW

 

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

 

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

 

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

 

During the second quarter of 2013, we experienced an increase in our consolidated net sales of 0.7 percent compared to the second quarter of 2012 (or 1.4 percent in local currencies). NSP Russia, Central and Eastern Europe net sales increased approximately 13.4 percent compared to the same period in 2012. Synergy WorldWide net sales decreased approximately 3.7 percent compared to the same period in 2012 (or 3.2 percent in local currencies). NSP Americas, Asia Pacific and Europe net sales decreased approximately 0.2 percent compared to the same period in 2012 (or an increase of 0.7 percent in local currencies). Our most significant sales revenue growth was from our NSP Russia, Central and Eastern Europe businesses in Belarus, Russia and the Ukraine, as well as our NSP Venezuela market. In addition, our NSP United States market also returned to net sales growth following declines in prior years. Gains in these markets were partially offset by decreases in other markets, principally NSP Canada, Japan, Peru and Synergy Japan, North America and South Korea.

 

Over the same period, selling, general and administrative expense as a percentage of net sales revenue increased from 28.5 percent in the prior year to 30.6 percent in the current year as a result of the Company’s incremental investment in sales, marketing, science and product development personnel and programs to stimulate sales growth and drive profitability.

 

We distribute our products to consumers through an independent sales force comprised of independent Managers and Distributors, some of whom also consume 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 17,100 at June 30, 2013 and 2012, and active Distributors and customers worldwide were approximately 331,000 and 337,600 at June 30, 2013 and 2012, respectively.

 

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

 

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

 

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Table of Contents

 

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

 

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

 

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

 

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

 

RESULTS OF OPERATIONS

 

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

 

 

 

 

 

 

 

 

 

 

 

Change from

 

 

 

2013

 

2012

 

2013 to 2012

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

 

 

 

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

Dollar

 

Percentage

 

Net sales revenue

 

$

93,675

 

100.0

%

$

92,991

 

100.0

%

$

684

 

0.7

%

Cost of sales

 

(22,630

)

(24.2

)

(22,610

)

(24.3

)

(20

)

(0.1

)

 

 

71,045

 

75.8

 

70,381

 

75.7

 

664

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume incentives

 

34,525

 

36.9

 

33,540

 

36.1

 

985

 

2.9

 

SG&A expenses

 

28,709

 

30.6

 

26,530

 

28.5

 

2,179

 

8.2

 

Operating income

 

7,811

 

8.3

 

10,311

 

11.1

 

(2,500

)

(24.2

)

Other income, net

 

1,482

 

1.6

 

165

 

0.2

 

1,317

 

798.2

 

Income before provision for income taxes

 

9,293

 

9.9

 

10,476

 

11.3

 

(1,183

)

(11.3

)

Provision for income taxes

 

3,241

 

3.4

 

3,190

 

3.4

 

51

 

1.6

 

Net income

 

$

6,052

 

6.5

%

$

7,286

 

7.9

%

$

(1,234

)

(16.9

)%

 

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, 2013 and 2012 (dollar amounts in thousands).

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

Change from

 

 

 

2013

 

2012

 

2013 to 2012

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

 

 

 

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

Dollar

 

Percentage

 

Net sales revenue

 

$

190,154

 

100.0

%

$

185,859

 

100.0

%

$

4,295

 

2.3

%

Cost of sales

 

(47,075

)

(24.8

)

(46,339

)

(24.9

)

(736

)

(1.6

)

 

 

143,079

 

75.2

 

139,520

 

75.1

 

3,559

 

2.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume incentives

 

69,500

 

36.5

 

67,121

 

36.1

 

2,379

 

3.5

 

SG&A expenses

 

58,826

 

30.9

 

52,914

 

28.5

 

5,912

 

11.2

 

Operating income

 

14,753

 

7.8

 

19,485

 

10.5

 

(4,732

)

(24.3

)

Other income, net

 

1,812

 

0.9

 

55

 

0.0

 

1,757

 

3,194.5

 

Income before provision for income taxes

 

16,565

 

8.7

 

19,540

 

10.5

 

(2,975

)

(15.2

)

Provision for income taxes

 

5,649

 

3.0

 

5,026

 

2.7

 

623

 

12.4

 

Net income

 

$

10,916

 

5.7

%

$

14,514

 

7.8

%

$

(3,598

)

(24.8

)%

 

Net Sales Revenue

 

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

 

 

 

QTD Net Sales Revenue by Operating Segment

 

 

 

2013

 

2012

 

Percent
Change

 

Impact of
Currency
Exchange

 

Percent
Change
Excluding
Impact of
Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

 

 

NSP North America

 

$

39,577

 

$

39,529

 

0.1

%

$

(46

)

0.2

%

NSP Latin America

 

12,088

 

11,593

 

4.3

 

(237

)

6.3

 

NSP Asia Pacific and Europe

 

1,751

 

2,414

 

(27.5

)

(223

)

(18.2

)

 

 

53,416

 

53,536

 

(0.2

)

(506

)

0.7

 

 

 

 

 

 

 

 

 

 

 

 

 

NSP Russia, Central and Eastern Europe

 

$

14,978

 

$

13,209

 

13.4

%

$

4

 

13.4

%

 

 

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

 

 

Synergy North America

 

$

4,579

 

$

4,887

 

(6.3

)%

$

 

(6.3

)%

Synergy Asia Pacific

 

13,127

 

14,262

 

(8.0

)

(252

)

(6.2

)

Synergy Europe

 

7,575

 

7,097

 

6.7

 

127

 

4.9

 

 

 

25,281

 

26,246

 

(3.7

)

(125

)

(3.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

93,675

 

$

92,991

 

0.7

%

$

(627

)

1.4

%

 

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Table of Contents

 

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

 

 

 

YTD Net Sales Revenue by Operating Segment

 

 

 

2013

 

2012

 

Percent
Change

 

Impact of
Currency
Exchange

 

Percent
Change
Excluding
Impact of
Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

 

 

NSP North America

 

$

79,081

 

$

78,995

 

0.1

%

$

(66

)

0.2

%

NSP Latin America

 

23,978

 

23,453

 

2.2

 

(339

)

3.7

 

NSP Asia Pacific and Europe

 

3,494

 

5,023

 

(30.4

)

(374

)

(23.0

)

 

 

106,553

 

107,471

 

(0.9

)

(779

)

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

NSP Russia, Central and Eastern Europe

 

$

31,118

 

$

28,799

 

8.1

%

$

9

 

8.1

%

 

 

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

 

 

Synergy North America

 

$

8,769

 

$

9,789

 

(10.4

)%

$

 

(10.4

)%

Synergy Asia Pacific

 

27,270

 

25,662

 

6.3

 

(360

)

7.7

 

Synergy Europe

 

16,444

 

14,138

 

16.3

 

197

 

14.9

 

 

 

52,483

 

49,589

 

5.8

 

(163

)

6.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

190,154

 

$

185,859

 

2.3

%

$

(933

)

2.8

%

 

Consolidated net sales revenue for the three and six months ended June 30, 2013 was $93.7 million and $190.2 million compared to $93.0 million and $185.9 million for the same periods in 2012, increases of approximately 0.7 percent and 2.3 percent, respectively. We experienced a $0.6 million and $0.9 million unfavorable impact in foreign currency exchange rate fluctuations in the three and six months ended June 30, 2013, respectively, and our consolidated net sales revenue would have increased by 1.4 percent and 2.8 percent from 2012 excluding the negative impact, respectively. The increase in net sales revenue for the three and six months ended June 30, 2013 compared to the same periods in 2012 is primarily due to an increase of net sales in our NSP Russia, Central and Eastern Europe segment and was partially offset by a decline of net sales in our NSP Americas, Asia Pacific and Europe and Synergy WorldWide 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, 2013 was $53.4 million and $106.6 million, respectively compared to $53.5 million and $107.5 million for the same periods in 2012, or decreases of 0.2 percent and 0.9 percent, respectively, in 2013 compared to 2012. Fluctuations in foreign exchange rates had a $0.5 million and $0.8 million unfavorable impact on net sales for the three and six months ended June 30, 2013, respectively, and net sales revenue would have increased by 0.7 percent and decreased by 0.1 percent from the same periods in 2012 excluding the negative impact. Active Managers within NSP Americas, Asia Pacific and Europe totaled approximately 9,000 and 9,200 at June 30, 2013 and 2012, respectively. Active Distributors and customers within NSP Americas, Asia Pacific and Europe totaled approximately 155,400 and 164,900 at June 30, 2013 and 2012, respectively. Managers and Distributors within NSP Americas, Asia Pacific and Europe are predominantly practitioners of nutritional supplement therapies and retailers and consumers of our products. Segment net sales revenue and the number of Distributors and customers decreased primarily due to lower recruiting in the NSP Canada and Japan markets and were partially offset by increased activity in the NSP United States and Venezuela markets. Active Managers includes independent Managers under our various compensation plans that have achieved and maintained certain product sales levels. As such, all Managers are considered to be active Managers. Active Distributors and customers includes our independent Distributors and customers who have purchased products directly from the Company for resale and/or personal consumption during the previous three months.

 

In the United States, net sales revenues increased approximately $0.1 million and $0.2 million, or 0.3 percent and 0.3 percent, for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. Our net sales increased year-over-year for the second consecutive quarter. We are driving growth through investment in sales and marketing personnel, training, the launch of new products (including the strengthening of our weight management category), sales programs and incentive programs.

 

In Venezuela, net sales revenues increased approximately $0.2 million and $0.8 million, or 15.0 percent and 25.3 percent, for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales

 

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increased 36.8 percent and 41.6 percent, respectively, compared to the same periods in 2012. Due to Venezuela’s highly inflationary currency, fluctuations in foreign exchange rates had a $0.4 million and $0.5 million unfavorable impact on net sales for the three and six months ended June 30, 2013, respectively. The increase in local currency net sales is due to an increased Manager and Distributor base in addition to price increases.

 

In Mexico, net sales revenues increased approximately $0.2 million and $0.2 million, or 8.8 percent and 3.1 percent, for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 0.1 percent and decreased 2.3 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.2 and $0.3 million favorable impact on net sales for the three and six months ended June 30, 2013, respectively. The improvement in the second quarter of 2013 over the first quarter of 2013 is a result of investment in local sales and marketing initiatives, including hiring a new General Manager for the market who started on April 1, 2013.  We have plans to launch new products into the market, and to increase the efficiency and effectiveness of distribution to our Distributors and customers later in 2013.

 

In Japan, net sales revenues decreased approximately $0.5 million and $1.3 million, or 38.3 percent and 42.5 percent, for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales decreased 24.2 percent and 31.2 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.2 and $0.3 million unfavorable impact on net sales for the three and six months ended June 30, 2013, respectively. The decrease in local currency net sales is primarily due to the continued lower activity in our existing Manager and Distributor base and we continue in our efforts to stabilize the business.

 

NSP Russia, Central and Eastern Europe

 

Net sales revenue related to NSP Russia, Central and Eastern Europe markets (primarily Russia, the Ukraine, and Belarus) for the three and six months ended June 30, 2013 was $15.0 million and $31.1 million, respectively compared to $13.2 million and $28.8 million for the same periods in 2012, an increase of 13.4 percent and 8.1 percent, respectively. Fluctuations in foreign exchange rates had a nominally favorable impact on net sales for the three and six months ended June 30, 2013.  Active Managers within NSP Russia, Central and Eastern Europe totaled approximately 5,000 and 4,700 at June 30, 2013 and 2012, respectively. Active Distributors and customers within NSP Russia, Central and Eastern Europe totaled approximately 120,900 and 117,800 at June 30, 2013 and 2012, respectively. NSP Russia, Central and Eastern Europe’s business model is more oriented to a network marketing approach when compared to that of NSP Americas, Asia Pacific and Europe. Net sales increased year-over-year for the third consecutive quarter as a result of improved recruiting, Distributor leadership engagement, Distributor recognition, promotion and training, and the enhanced focus afforded by the corporate organizational realignment during 2012.

 

Synergy WorldWide

 

Net sales revenue related to Synergy WorldWide for the three and six months ended June 30, 2013 was $25.3 million, and $52.5 million, respectively, compared to $26.2 million and $49.6 million for the same periods in 2012, a decrease of 3.7 percent and an increase of 5.8 percent, respectively. Fluctuations in foreign exchange rates had a $0.1 million and $0.2 million unfavorable impact on net sales for the three and six months ended June 30, 2013, respectively, and net sales revenue would have decreased by 3.2 percent and increased by 6.2 percent from 2012 excluding the negative impact, respectively. Active Managers within Synergy WorldWide totaled approximately 3,100 and 3,200 at June 30, 2013 and 2012, respectively. Active Distributors and customers within Synergy WorldWide totaled approximately 54,700 and 54,900 at June 30, 2013 and 2012, respectively. Synergy WorldWide’s business model is operating under a traditional network marketing approach. The decrease in net sales is due to lower net sales in Japan, North America and South Korea partially offset by higher net sales in Europe.

 

In Europe, net sales revenues increased approximately $0.5 million and $2.3 million, or 6.7 percent and 16.3 percent, for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 4.9 percent and 6.2 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.1 and $0.2 million favorable impact on net sales for the three and six months ended June 30, 2013, respectively. Strong Distributor leadership in recruiting and training efforts continues to effectively build our Distributor base thereby driving increased market penetration and we have invested in strengthening our sales and marketing organization.

 

In South Korea, net sales revenues decreased approximately $0.9 million and increased approximately $0.3 million, or a decrease of 11.0 percent and an increase of 2.0 percent, for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales decreased 13.0 percent and 1.2 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.2 and $0.4 million favorable impact on net sales for the three and six months ended June 30, 2013, respectively. The decrease in local currency net sales is primarily a result of decreased recruiting activity

 

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Table of Contents

 

and a change in product focus. In addition, key Distributor leaders had diluted their focus on the South Korean market as they expanded their businesses in our other Asian markets. Programs have been implemented with the aim of restoring recruiting activity.

 

In Japan, net sales revenues decreased approximately $0.8 million and $1.0 million, or 32.3 percent and 20.3 percent, for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales decreased 16.1 percent and 4.6 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.4 and $0.8 million unfavorable impact on net sales for the three and six months ended June 30, 2013, respectively. The decrease in net sales was due to the loss of key Managers and Distributors as well as lower activity in response to promotions and incentive-related trips.

 

In North America, net sales revenues decreased approximately $0.3 million and $1.0 million, or 6.3 percent and 10.4 percent, for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012. The decline in sales is primarily driven by lower Distributor recruiting.  In order to return the market to growth, we have launched new initiatives aimed at increasing leadership involvement and driving Distributor recruitment; these initiatives include a weight-management product line, training meetings and sales promotions.

 

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

 

Cost of Sales

 

Cost of sales as a percent of net sales revenue decreased slightly to 24.2 percent and 24.8 percent for the three and six months ended June 30, 2013, respectively, compared to 24.3 percent and 24.9 percent for the same periods in 2012.

 

Volume Incentives

 

Volume incentives are a significant part of our direct sales marketing program, and represent commission payments made to our independent Managers and Distributors. These payments are designed to provide incentives for reaching higher product sales levels.  Volume incentives vary slightly, on a percentage basis, by product due to our pricing policies and commission plans in place and the sales mix in our various markets.  Volume incentives as a percent of net sales revenue increased to 36.9 percent and 36.5 percent for the three and six months ended June 30, 2013, respectively, compared to 36.1 percent for each of the same periods in 2012. The increases were primarily due to increases in product purchases that pay a higher sales commission in our NSP Russia, Central and Eastern Europe segment.

 

Selling, General and Administrative

 

Selling, general and administrative expenses increased by approximately $2.2 million and $5.9 million to $28.7 million and $58.8 million for the three and six months ended June 30, 2013, respectively. Selling, general and administrative expenses were 30.6 percent and 30.9 percent of net sales revenue for the three and six months ended June 30, 2013, respectively, compared to 28.5 percent and 28.5 percent for the same periods in 2012.

 

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

 

·                  $1.1 and $2.6 million of increased compensation and other benefit costs as a result of the Company’s incremental investment in sales, marketing, science and product development personnel and programs to stimulate sales growth and drive profitability;

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

 

Other Income, Net

 

Other income, net for the three and six months ended June 30, 2013 increased to $1.5 million and $1.8 million, respectively, compared to the same periods in 2012 primarily due to increased foreign exchange rate gains on United States Dollar denominated cash balances held in foreign markets.

 

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Table of Contents

 

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, 2013 and 2012, the Company’s provision for income taxes, as a percentage of income before income taxes was 34.9 percent and 30.5 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the six months ended June 30, 2013 and 2012, the Company’s provision for income taxes, as a percentage of income before income taxes was 34.1 percent and 25.7 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, 2013 was primarily attributed to an increase in tax liabilities associated with uncertain tax positions (0.6 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-0.6 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended June 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-3.4 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-2.2 percent).

 

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 (5.3 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-5.6 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the six months ended June 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.4 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.1 percent).

 

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

 

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

 

As of June 30, 2013, the Company had accrued $10.8 million related to unrecognized tax positions compared with $10.6 million as of December 31, 2012. This net increase was primarily attributed to the increase in transfer pricing contingencies, including anticipated increases in penalties and interest.

 

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

 

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

 

Product Categories

 

Our line of over 700 products includes herbal products, vitamins, mineral and other nutritional supplements, personal care products and other complementary products such as homeopathic products and sales aids. We purchase herbs and other raw materials in bulk and, after quality control testing, we formulate, encapsulate, tablet or concentrate them, and package them for shipment. Most

 

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of our products are manufactured at our facility in Spanish Fork, Utah. Contract manufacturers produce some of our vitamins, mineral and other nutritional supplements, personal care products and certain other miscellaneous products in accordance with our specifications and standards. We have implemented stringent quality control procedures to verify that our contract manufacturers have complied with our specifications and standards.

 

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

 

 

 

Three Months Ended
June 30,

 

 

 

2013

 

2012

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

31,009

 

58.1

%

$

30,278

 

56.6

%

Vitamin, mineral and other nutritional supplements

 

20,086

 

37.6

 

20,725

 

38.7

 

Personal care products

 

1,353

 

2.5

 

1,579

 

2.9

 

Other products

 

968

 

1.8

 

954

 

1.8

 

 

 

53,416

 

100.0

%

53,536

 

100.0

%

 

 

 

 

 

 

 

 

 

 

NSP Russia, Central and Eastern Europe:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

6,864

 

45.8

%

$

5,775

 

43.7

%

Vitamin, mineral and other nutritional supplements

 

7,001

 

46.8

 

5,764

 

43.7

 

Personal care products

 

1,066

 

7.1

 

1,627

 

12.3

 

Other products

 

47

 

0.3

 

43

 

0.3

 

 

 

14,978

 

100.0

%

13,209

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

10,149

 

40.1

%

$

11,530

 

44.0

%

Vitamin, mineral and other nutritional supplements

 

13,426

 

53.1

 

13,028

 

49.6

 

Personal care products

 

1,364

 

5.4

 

1,188

 

4.5

 

Other products

 

342

 

1.4

 

500

 

1.9

 

 

 

25,281

 

100.0

%

26,246

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Consolidated:

 

 

 

 

 

 

 

 

 

Herbal Products

 

$

48,022

 

51.3

%

$

47,583

 

51.2

%

Vitamin, Mineral and Other Nutritional Supplements

 

40,513

 

43.2

 

39,517

 

42.5

 

Personal Care Products

 

3,783

 

4.0

 

4,394

 

4.7

 

Other Products

 

1,357

 

1.5

 

1,497

 

1.6

 

 

 

$

93,675

 

100.0

%

$

92,991

 

100.0

%

 

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Table of Contents

 

 

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

NSP Americas, Asia Pacific and Europe:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

61,385

 

57.6

%

$

60,922

 

56.7

%

Vitamin, mineral and other nutritional supplements

 

40,570

 

38.1

 

41,187

 

38.3

 

Personal care products