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 September 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
NATURES SUNSHINE PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
Utah |
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87-0327982 |
(State or other jurisdiction of |
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(IRS Employer |
incorporation or organization) |
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Identification No.) |
2500 West Executive Parkway, Suite 100
Lehi, Utah 84043
(Address of principal executive offices and zip code)
(801) 341-7900
(Registrants 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 |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 October 28, 2013 was 16,207,747 shares.
NATURES SUNSHINE PRODUCTS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2013
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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33 | ||
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NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
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September 30, |
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December 31, |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
76,623 |
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$ |
79,241 |
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Accounts receivable, net of allowance for doubtful accounts of $1,008 and $631, respectively |
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10,908 |
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9,614 |
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Investments available for sale |
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2,080 |
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2,071 |
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Inventories |
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43,643 |
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43,280 |
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Deferred income tax assets |
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5,284 |
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5,307 |
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Prepaid expenses and other |
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6,864 |
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5,820 |
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Total current assets |
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145,402 |
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145,333 |
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Property, plant and equipment, net |
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29,347 |
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27,950 |
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Investment securities |
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1,109 |
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1,276 |
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Intangible assets, net |
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891 |
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1,002 |
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Deferred income tax assets |
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11,487 |
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11,516 |
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Other assets |
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6,851 |
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6,842 |
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$ |
195,087 |
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$ |
193,919 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
7,209 |
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$ |
6,226 |
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Accrued volume incentives |
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20,014 |
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18,130 |
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Accrued liabilities |
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28,803 |
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27,302 |
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Deferred revenue |
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3,820 |
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4,311 |
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Current installments of long-term debt |
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3,110 |
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3,350 |
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Income taxes payable |
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2,174 |
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2,071 |
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Total current liabilities |
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65,130 |
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61,390 |
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Liability related to unrecognized tax benefits |
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11,486 |
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10,571 |
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Long-term debt |
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10,000 |
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2,270 |
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Deferred compensation payable |
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1,109 |
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1,276 |
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Other liabilities |
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2,535 |
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2,776 |
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Total long-term liabilities |
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25,130 |
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16,893 |
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Commitments and Contingencies |
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Shareholders equity: |
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Common stock, no par value, 50,000 shares authorized, 16,208 and 15,810 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively |
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82,246 |
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77,292 |
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Retained earnings |
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35,879 |
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48,910 |
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Accumulated other comprehensive loss |
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(13,298 |
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(10,566 |
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Total shareholders equity |
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104,827 |
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115,636 |
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$ |
195,087 |
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$ |
193,919 |
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See accompanying notes to unaudited condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share information)
(Unaudited)
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Three Months Ended |
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2013 |
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2012 |
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Net sales revenue |
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$ |
92,458 |
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$ |
91,232 |
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Cost of sales |
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(23,655 |
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(23,144 |
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Gross profit |
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68,803 |
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68,088 |
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Operating expenses: |
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Volume incentives |
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33,920 |
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33,155 |
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Selling, general and administrative |
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28,170 |
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26,228 |
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Operating income |
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6,713 |
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8,705 |
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Other income (expense), net |
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(269 |
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(214 |
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Income before provision for income taxes |
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6,444 |
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8,491 |
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Provision for income taxes |
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1,594 |
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2,121 |
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Net income |
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$ |
4,850 |
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$ |
6,370 |
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Basic and diluted net income per common share |
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Basic: |
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Net income |
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$ |
0.30 |
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$ |
0.41 |
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Diluted: |
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Net income |
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$ |
0.29 |
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$ |
0.40 |
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Weighted average basic common shares outstanding |
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16,068 |
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15,628 |
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Weighted average diluted common shares outstanding |
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16,490 |
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15,971 |
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Dividends declared per common share |
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$ |
1.60 |
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$ |
0.05 |
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See accompanying notes to unaudited condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
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Three Months Ended |
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2013 |
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2012 |
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Net income |
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$ |
4,850 |
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$ |
6,370 |
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Foreign currency translation gain (net of tax) |
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1,128 |
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1,416 |
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Net unrealized gains on investment securities (net of tax) |
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36 |
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20 |
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Total comprehensive income |
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$ |
6,014 |
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$ |
7,806 |
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See accompanying notes to unaudited condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share information)
(Unaudited)
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Nine Months Ended |
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2013 |
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2012 |
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Net sales revenue |
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$ |
282,612 |
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$ |
277,091 |
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Cost of sales |
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(70,730 |
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(69,483 |
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Gross profit |
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211,882 |
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207,608 |
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Operating expenses: |
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Volume incentives |
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103,420 |
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100,276 |
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Selling, general and administrative |
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86,996 |
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79,142 |
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Operating income |
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21,466 |
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28,190 |
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Other income (expense), net |
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1,543 |
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(159 |
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Income before provision for income taxes |
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23,009 |
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28,031 |
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Provision for income taxes |
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7,243 |
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7,147 |
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Net income |
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15,766 |
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20,884 |
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Basic and diluted net income per common share |
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Basic: |
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Net income |
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$ |
0.99 |
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$ |
1.34 |
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Diluted: |
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Net income |
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$ |
0.97 |
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$ |
1.31 |
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Weighted average basic common shares outstanding |
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15,930 |
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15,603 |
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Weighted average diluted common shares outstanding |
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16,327 |
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15,917 |
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Dividends declared per common share |
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$ |
1.80 |
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$ |
0.10 |
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See accompanying notes to unaudited condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
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Nine Months Ended |
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2013 |
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2012 |
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Net income |
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$ |
15,766 |
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$ |
20,884 |
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Foreign currency translation gain (loss) (net of tax) |
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(2,798 |
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1,061 |
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Net unrealized gains on investment securities (net of tax) |
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66 |
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41 |
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Total comprehensive income |
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$ |
13,034 |
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$ |
21,986 |
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See accompanying notes to unaudited condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
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Nine Months Ended |
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2013 |
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2012 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
15,766 |
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$ |
20,884 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for doubtful accounts |
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322 |
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39 |
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Depreciation and amortization |
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3,279 |
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3,028 |
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Share-based compensation expense |
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2,599 |
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2,001 |
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(Gain) loss on sale of property and equipment |
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(127 |
) |
23 |
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Deferred income taxes |
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52 |
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(307 |
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Amortization of bond discount |
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1 |
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3 |
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Purchase of trading investment securities |
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(62 |
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(60 |
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Proceeds from sale of trading investment securities |
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308 |
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268 |
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Realized and unrealized gains on investments |
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(78 |
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(63 |
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Foreign exchange (gains) losses |
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(1,057 |
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856 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(1,781 |
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(429 |
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Inventories |
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(678 |
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(1,926 |
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Prepaid expenses and other current assets |
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(1,083 |
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(1,021 |
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Other assets |
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(97 |
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(148 |
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Accounts payable |
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878 |
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(361 |
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Accrued volume incentives |
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2,047 |
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386 |
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Accrued liabilities |
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1,284 |
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(1,264 |
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Deferred revenue |
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(491 |
) |
403 |
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Income taxes payable |
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199 |
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(4,222 |
) | ||
Liability related to unrecognized tax benefits |
|
915 |
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(654 |
) | ||
Deferred compensation payable |
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(167 |
) |
(112 |
) | ||
Net cash provided by operating activities |
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22,029 |
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17,324 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property, plant and equipment |
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(4,590 |
) |
(5,617 |
) | ||
Proceeds from sale of property, plant and equipment |
|
233 |
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25 |
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Proceeds from maturity and sale of investments available for sale |
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100 |
|
3,689 |
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Purchase of investments available for sale |
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(278 |
) |
(197 |
) | ||
Net cash used in investing activities |
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(4,535 |
) |
(2,100 |
) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings on revolving credit facility |
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10,000 |
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|
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Principal payments of long-term debt |
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(2,509 |
) |
(2,465 |
) | ||
Dividends paid |
|
(28,797 |
) |
(1,560 |
) | ||
Proceeds from the exercise of stock options |
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4,300 |
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1,982 |
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Repurchase of common stock |
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(1,945 |
) |
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| ||
Net cash used in financing activities |
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(18,951 |
) |
(2,043 |
) | ||
Effect of exchange rates on cash and cash equivalents |
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(1,161 |
) |
393 |
| ||
Net increase (decrease) in cash and cash equivalents |
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(2,618 |
) |
13,574 |
| ||
Cash and cash equivalents at the beginning of the period |
|
79,241 |
|
58,969 |
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Cash and cash equivalents at the end of the period |
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$ |
76,623 |
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$ |
72,543 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid for income taxes |
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$ |
7,068 |
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$ |
12,694 |
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Cash paid for interest |
|
95 |
|
97 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per-share information)
(Unaudited)
(1) Basis of Presentation
Natures Sunshine Products, Inc., together with its subsidiaries (hereinafter referred to collectively as the Company), is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. The Company is a Utah corporation with its principal place of business in Lehi, Utah and sells its products to a sales force of 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 Companys major product groups are subject to regulation by one or more governmental agencies.
The Company markets its products in Australia, Austria, Belarus, Canada, Colombia, Costa Rica, the Czech Republic, Denmark, the Dominican Republic, Ecuador, El Salvador, Finland, Germany, Guatemala, Honduras, Hong Kong, Iceland, Indonesia, Ireland, Japan, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Moldova, Mongolia, the Netherlands, Nicaragua, Norway, Panama, Peru, the Philippines, Poland, Russia, Singapore, Slovenia, South Korea, Spain, Sweden, Taiwan, Thailand, 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 Companys financial information as of September 30, 2013, and for the three and nine-month periods ended September 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 Companys 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 Companys 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 governments currency control agency (CADIVI) in order for the Companys 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 CADIVI. In 2013, the CADIVI 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, entities domiciled in Venezuela must formerly apply and be approved by the CADIVI to obtain U.S. dollars or U.S. dollar denominated securities through banking institutions approved by the government. On a daily basis, the CADIVI will determine how many U.S. dollars will be sold and which previously approved 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 official SICAD rate, which was approximately 6.3 bolivars per U.S. dollar as of September 30, 2013. However, since the inception of the SICAD system, the Company has been unsuccessful in obtaining
U.S. dollars at the official SICAD exchange rate and it remains uncertain when the Companys applications will be approved by the CADIVI to complete exchange transactions in the future.
During the three months ended September 30, 2013 and 2012, the Companys Venezuelan subsidiarys net sales revenue represented approximately 2.2 percent and 1.9 percent of consolidated net sales revenue, respectively. During the nine months ended September 30, 2013 and 2012, the Companys Venezuelan subsidiarys net sales revenue represented approximately 2.1 percent and 1.8 percent of consolidated net sales revenue, respectively. As of September 30, 2013 and December 31, 2012, the Companys Venezuelan subsidiary held cash and cash equivalents of $3,515 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 SICAD exchange rate.
Classification of Belarus as a Highly Inflationary Economy and Devaluation of Its Currency
Since June 30, 2012, Belarus was designated as a highly inflationary economy. The U.S. dollar is the Companys 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 Companys Belarusian subsidiary. However, as a result of the weakening of the Belarusian ruble, the purchasing power of the Companys Distributors in this market has diminished. During the three months ended September 30, 2013 and 2012, the Companys Belarusian subsidiarys net sales revenue represented approximately 2.1 percent and 1.5 percent of consolidated net sales revenue, respectively. During the nine months ended September 30, 2013 and 2012, the Companys Belarusian subsidiarys net sales revenue represented approximately 2.1 percent and 1.6 percent of consolidated net sales revenue, respectively.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The amendments in this update are effective for interim and annual periods beginning after December 15, 2013. The adoption of this ASU is not expected to have a material impact on the Companys consolidated financial statements.
(2) Inventories
Inventories consist of the following:
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|
September 30, |
|
December 31, |
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|
|
2013 |
|
2012 |
| ||
Raw Materials |
|
$ |
11,819 |
|
$ |
13,287 |
|
Work in Progress |
|
931 |
|
742 |
| ||
Finished Goods |
|
30,893 |
|
29,251 |
| ||
|
|
$ |
43,643 |
|
$ |
43,280 |
|
(3) Intangible Assets
At September 30, 2013 and December 31, 2012, intangibles for product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $872 and $761, and a net amount of $891 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 September 30, 2013 and 2012 was $37 and $37, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2013 and 2012 was $111 and $111, 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 September 30, 2013 |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
| ||||
Municipal obligations |
|
$ |
504 |
|
$ |
15 |
|
$ |
|
|
$ |
519 |
|
U.S. government securities funds |
|
997 |
|
|
|
(11 |
) |
986 |
| ||||
Equity securities |
|
227 |
|
351 |
|
(3 |
) |
575 |
| ||||
Total short-term investment securities |
|
$ |
1,728 |
|
$ |
366 |
|
$ |
(14 |
) |
$ |
2,080 |
|
As of December 31, 2012 |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
| ||||
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 $519 at September 30, 2013 all mature in less than two years.
During the nine-month periods ended September 30, 2013 and 2012, the proceeds from the maturities and sales of available-for-sale securities were $100 and $3,689, respectively. There were no gross realized gains (losses) on sales of available-for-sale securities (net of tax) for the nine-month periods ended September 30, 2013 and 2012, respectively.
The Companys trading securities portfolio totaled $1,109 at September 30, 2013 and $1,276 at December 31, 2012, and generated gains of $45 and $44 for the three months ended September 30, 2013 and 2012, respectively, and generated gains of $78 and $104 for the nine months ended September 30, 2013 and 2012, respectively.
As of September 30, 2013 and December 31, 2012, the Company had unrealized losses of $11 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 (1.50 percent as of September 30, 2013). The Company must pay an annual commitment fee of 0.25 percent on the unused portion of the commitment.
On August 8, 2013, the Company renegotiated the revolving credit agreement with Wells Fargo Bank, N.A. to increase to the borrowing limit to $25,000 and extend the maturity to September 1, 2015. At September 30, 2013, the outstanding balance under the revolving credit agreement was $10,000.
A term loan of $10,000 was obtained in conjunction with the revolving credit agreement with Wells Fargo Bank, N.A. and has a maturity date of August 9, 2014 and a variable interest rate of LIBOR plus 1.25 percent (1.50 percent as of September 30, 2013 and December 31, 2012). As of September 30, 2013, the outstanding balance under the term loan was $3,110. The term loan is collateralized by the Companys manufacturing facility in Spanish Fork, Utah.
Long-term debt consists of the following:
|
|
September 30, |
|
December 31, |
| ||
|
|
2013 |
|
2012 |
| ||
Term loan in monthly installments of approximately $284, including interest |
|
$ |
3,110 |
|
$ |
5,620 |
|
Less current installments |
|
(3,110 |
) |
(3,350 |
) | ||
|
|
|
|
2,270 |
| ||
|
|
|
|
|
| ||
Revolving credit agreement |
|
10,000 |
|
|
| ||
|
|
|
|
|
| ||
Long-term debt less current installments |
|
$ |
10,000 |
|
$ |
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 September 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.
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 nine months ended September 30, 2013 and 2012:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Net income |
|
$ |
4,850 |
|
$ |
6,370 |
|
$ |
15,766 |
|
$ |
20,884 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
|
16,068 |
|
15,628 |
|
15,930 |
|
15,603 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic net income per common share |
|
$ |
0.30 |
|
$ |
0.41 |
|
$ |
0.99 |
|
$ |
1.34 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted shares outstanding |
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
|
16,068 |
|
15,628 |
|
15,930 |
|
15,603 |
| ||||
Weighted average stock options outstanding |
|
422 |
|
343 |
|
397 |
|
314 |
| ||||
Diluted weighted average shares outstanding |
|
16,490 |
|
15,971 |
|
16,327 |
|
15,917 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Diluted net income per common share |
|
$ |
0.29 |
|
$ |
0.40 |
|
$ |
0.97 |
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
| ||||
Potentially dilutive shares excluded from diluted per share amounts: |
|
|
|
|
|
|
|
|
| ||||
Stock options |
|
140 |
|
96 |
|
140 |
|
96 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Potentially anti-dilutive shares excluded from diluted per share amounts: |
|
|
|
|
|
|
|
|
| ||||
Stock options |
|
20 |
|
167 |
|
45 |
|
249 |
|
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 nine months ended September 30, 2013 and 2012.
(7) Capital Transactions
Dividends
The declaration of future dividends is subject to the discretion of the Companys Board of Directors and will depend upon various factors, including the Companys 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 Companys 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 Companys 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 Companys Board of Directors declared a special one-time cash dividend of $1.50 per common share in addition to the Companys recurring quarterly dividend of $0.10 per common share that was paid on August 29, 2013 to shareholders of record on August 19, 2013. The amount of the cash dividend paid to shareholders was $25,627.
Share Repurchase Program
On August 8, 2013, the Board of Directors authorized a $10,000 share repurchase program to be implemented over two years. Such purchases may be made in the open market, through block trades, in privately negotiated transactions or otherwise. The timing and amount of any shares repurchased will be determined based on the Companys evaluation of market conditions and other factors and the program may be discontinued or suspended at any time.
The following is a summary of our repurchases of common shares during the three months ended September 30, 2013:
Period |
|
Number of |
|
Average |
|
Program Balance Used |
| ||
July 1 September 30, 2013 |
|
108 |
|
$ |
18.06 |
|
$ |
1,945 |
|
Share-Based Compensation
Stock option activity for the nine months ended September 30, 2013 is as follows:
|
|
Number of |
|
Weighted Average |
| |
Options outstanding at December 31, 2012 |
|
1,784 |
|
$ |
11.81 |
|
Granted |
|
667 |
|
15.24 |
| |
Forfeited |
|
(152 |
) |
13.71 |
| |
Exercised |
|
(502 |
) |
8.56 |
| |
Options outstanding at September 30, 2013 |
|
1,797 |
|
12.02 |
| |
On August 29, 2013, the Company paid a special one-time cash dividend of $1.50 per common share. In accordance with the provisions of the Companys stock incentive plans, the exercise price of all outstanding stock options on the ex-dividend date were decreased by $1.50 per share in order to prevent a dilution of benefits or potential benefits intended to be made available to the stock option holders. Therefore, no additional share-based compensation expense was recorded.
The Companys 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 nine-month period ended September 30, 2013, the Company granted options to purchase 667 shares of common stock under the 2012 Stock Incentive Plan to the Companys 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 $15.24 per share and a weighted-average grant date fair value of $6.27 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 nine-month period ended September 30, 2013:
|
|
2013 |
|
Expected life (in years) |
|
5.0 to 6.0 |
|
Risk-free interest rate |
|
0.6 to 1.5 |
|
Expected volatility |
|
56.1 to 58.2 |
|
Dividend yield |
|
2.1 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 Companys 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 September 30, 2013 and 2012 was approximately $620 and $630, respectively, and the related tax benefit was approximately $245 and $246, respectively. Share-based compensation expense from time-based stock options for the nine-month periods ended September 30, 2013 and 2012 was approximately $2,423 and $1,299, respectively and the related tax benefit was approximately $957 and $513, respectively. As of September 30, 2013 and December 31, 2012, the unrecognized share-based compensation expense related to the grants described above was $3,115 and $2,715, respectively. As of September 30, 2013, the remaining compensation expense is expected to be recognized over the weighted-average period of approximately 1.9 years.
There was no shared-based compensation expense from operating income performance-based stock options for the three-month periods ended September 30, 2013 and 2012. Shared-based compensation expense from operating income performance-based stock options for the nine-month periods ended September 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 nine months ended September 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 $900 of potential share-based compensation expense.
At September 30, 2013, the aggregate intrinsic value of outstanding time-based and performance-based stock options to purchase 1,797 shares of common stock, exercisable time-based and performance-based stock options to purchase 839 shares of common stock and time-based and performance-based stock options to purchase 777 shares of common stock that are expected to vest (net of expected forfeitures) was $12,565, $7,497 and $4,066, 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.
Restricted stock unit activity for the nine months ended September 30, 2013 is as follows:
|
|
Number of |
|
Weighted Average |
| |
Units outstanding at December 31, 2012 |
|
18 |
|
$ |
12.07 |
|
Granted |
|
17 |
|
12.90 |
| |
Issued |
|
(3 |
) |
12.07 |
| |
Forfeited |
|
|
|
|
| |
Units outstanding at September 30, 2013 |
|
32 |
|
12.47 |
| |
On August 29, 2013, the Company paid a special one-time cash dividend of $1.50 per common share. In accordance with the provisions of the Company's stock incentive plans, additional RSUs were awarded based on the closing share price on the ex-dividend date in order to prevent a dilution of benefits or potential benefits intended to be made available to the RSU holders. Therefore, no additional share-based compensation expense was recorded.
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 companys 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 months ended September 30, 2013 and 2012, was approximately $49 and $50, respectively, and the related tax benefit was approximately $19 and $20, respectively. Share-based compensation expense from RSUs for the nine months ended September 30, 2013 and 2012, was approximately $176 and $50, respectively, and the related tax benefit was approximately $70 and $20, respectively. As of September 30, 2013 and December 31, 2012, the unrecognized share-based compensation expense related to the grants described above was $108 and $99, respectively. As of September 30, 2013, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 0.7 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 Natures 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 NSPs officers and their responsibilities (NSP Americas, Asia Pacific and Europe; and NSP Russia, Central and Eastern Europe). The Companys 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.
Reportable business segment information is as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Net sales revenue: |
|
|
|
|
|
|
|
|
| ||||
NSP Americas, Asia Pacific and Europe |
|
$ |
50,560 |
|
$ |
51,783 |
|
$ |
157,113 |
|
$ |
159,254 |
|
NSP Russia, Central and Eastern Europe |
|
14,577 |
|
13,187 |
|
45,695 |
|
41,986 |
| ||||
Synergy WorldWide |
|
27,321 |
|
26,262 |
|
79,804 |
|
75,851 |
| ||||
Total net sales revenue |
|
92,458 |
|
91,232 |
|
282,612 |
|
277,091 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Contribution margin (1): |
|
|
|
|
|
|
|
|
| ||||
NSP Americas, Asia Pacific and Europe |
|
19,973 |
|
20,513 |
|
64,234 |
|
63,708 |
| ||||
NSP Russia, Central and Eastern Europe |
|
5,409 |
|
5,043 |
|
16,915 |
|
16,069 |
| ||||
Synergy WorldWide |
|
9,501 |
|
9,377 |
|
27,313 |
|
27,555 |
| ||||
Total contribution margin |
|
34,883 |
|
34,933 |
|
108,462 |
|
107,332 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative |
|
28,170 |
|
26,228 |
|
86,996 |
|
79,142 |
| ||||
Total operating income |
|
6,713 |
|
8,705 |
|
21,466 |
|
28,190 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income (expense), net |
|
(269 |
) |
(214 |
) |
1,543 |
|
(159 |
) | ||||
Income before provision for income taxes |
|
$ |
6,444 |
|
$ |
8,491 |
|
$ |
23,009 |
|
$ |
28,031 |
|
(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 nine month periods ended September 30, 2013 and 2012 as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Net sales revenue: |
|
|
|
|
|
|
|
|
| ||||
United States |
|
$ |
37,209 |
|
$ |
38,243 |
|
$ |
116,552 |
|
$ |
118,390 |
|
Other |
|
55,249 |
|
52,989 |
|
166,060 |
|
158,701 |
| ||||
|
|
$ |
92,458 |
|
$ |
91,232 |
|
$ |
282,612 |
|
$ |
277,091 |
|
Revenue generated by each of the Companys product lines is set forth below:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
NSP Americas, Asia Pacific and Europe: |
|
|
|
|
|
|
|
|
| ||||
Herbal products |
|
$ |
29,372 |
|
$ |
28,888 |
|
$ |
90,757 |
|
$ |
89,809 |
|
Vitamin, mineral and other nutritional supplements |
|
19,102 |
|
20,379 |
|
59,672 |
|
61,566 |
| ||||
Personal care products |
|
1,179 |
|
1,560 |
|
3,786 |
|
4,861 |
| ||||
Other products |
|
907 |
|
956 |
|
2,898 |
|
3,018 |
| ||||
|
|
50,560 |
|
51,783 |
|
157,113 |
|
159,254 |
| ||||
NSP Russia, Central and Eastern Europe: |
|
|
|
|
|
|
|
|
| ||||
Herbal products |
|
$ |
6,656 |
|
$ |
5,834 |
|
$ |
20,692 |
|
$ |
18,389 |
|
Vitamin, mineral and other nutritional supplements |
|
6,854 |
|
5,954 |
|
21,337 |
|
18,686 |
| ||||
Personal care products |
|
1,016 |
|
1,354 |
|
3,511 |
|
4,775 |
| ||||
Other products |
|
51 |
|
45 |
|
155 |
|
136 |
| ||||
|
|
14,577 |
|
13,187 |
|
45,695 |
|
41,986 |
| ||||
Synergy WorldWide: |
|
|
|
|
|
|
|
|
| ||||
Herbal products |
|
$ |
9,520 |
|
$ |
10,005 |
|
$ |
31,608 |
|
$ |
29,982 |
|
Vitamin, mineral and other nutritional supplements |
|
15,967 |
|
14,510 |
|
42,725 |
|
40,575 |
| ||||
Personal care products |
|
1,471 |
|
1,394 |
|
4,405 |
|
4,020 |
| ||||
Other products |
|
363 |
|
353 |
|
1,066 |
|
1,274 |
| ||||
|
|
27,321 |
|
26,262 |
|
79,804 |
|
75,851 |
| ||||
|
|
$ |
92,458 |
|
$ |
91,232 |
|
$ |
282,612 |
|
$ |
277,091 |
|
From an individual country perspective, only the United States and Venezuela comprise 10 percent or more of consolidated property, plant and equipment as follows:
|
|
September 30, |
|
December 31, |
| ||
Property, plant and equipment: |
|
|
|
|
| ||
United States |
|
$ |
23,001 |
|
$ |
20,923 |
|
Venezuela |
|
3,297 |
|
3,535 |
| ||
Other |
|
3,049 |
|
3,492 |
| ||
Total property, plant and equipment |
|
$ |
29,347 |
|
$ |
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 September 30, 2013 and 2012, the Companys provision for income taxes, as a percentage of income before income taxes was 24.7 percent and 25.0 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the nine months ended September 30, 2013 and 2012, the Companys provision for income taxes, as a percentage of income before income taxes was 31.5 percent and 25.5 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 September 30, 2013 was primarily attributed to foreign tax credit benefits (-12.7 percent), net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-17.4 percent), offset by an increase in tax liabilities associated with uncertain tax positions (18.8 percent).
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.8 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 (-4.2 percent).
The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2013 was primarily attributed to foreign tax credit benefits (-4.3 percent), net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-5.9 percent), offset by an increase in tax liabilities associated with uncertain tax positions (6.4 percent).
The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.5 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 (-4.0 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 Companys 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 Companys U.S. federal income tax returns for 2009 through 2012 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 Companys U.S. federal income tax returns for the 2009 through 2011 tax years.
As of September 30, 2013, the Company had accrued $11,486 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 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 Companys 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, including those noted below. Management cannot predict the ultimate outcome of these proceedings, individually or in the aggregate, or their resulting effect on the Companys business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. The Company maintains product liability, general liability and excess liability insurance coverage. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to the Company, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.
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 managements 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 September 30, 2013 and December 31, 2012, accrued liabilities include $5,465 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.
Other Litigation
The Company is party to various other legal proceedings in several foreign jurisdictions related to VAT assessments and other civil litigation. While there is a reasonable possibility that a material loss may be incurred, either the losses are not considered to be probable or the Company cannot at this time estimate the loss, if any; therefore, no provision for losses has been provided. The Company believes future payments related to these matters could range from $0 to approximately $900.
Government Regulations
The Company is subject to governmental regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and to the Companys 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 Companys Distributors are not in compliance with existing statutes, laws, rules or regulations could potentially have a material adverse effect on the Companys 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 Companys 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 Companys 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 Companys hierarchy for its assets measured at fair value on a recurring basis as of September 30, 2013:
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
| ||||
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Total |
| ||||
Investments available for sale |
|
|
|
|
|
|
|
|
| ||||
Municipal obligations |
|
$ |
|
|
$ |
519 |
|
$ |
|
|
$ |
519 |
|
U.S. government security funds |
|
986 |
|
|
|
|
|
986 |
| ||||
Equity securities |
|
575 |
|
|
|
|
|
575 |
| ||||
Investment securities |
|
1,109 |
|
|
|
|
|
1,109 |
| ||||
Total assets measured at fair value on a recurring basis |
|
$ |
2,670 |
|
$ |
519 |
|
$ |
|
|
$ |
3,189 |
|
The following table presents the Companys 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 |
|
Significant |
|
Significant |
|
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 Companys investment portfolio consist of various securities such as state and municipal obligations, U.S. government security funds, short-term deposits and various equity securities. The Level 1 securities are valued using quoted prices for identical assets in active markets including equity securities and U.S. government treasuries. The Level 2 securities include investments in state and municipal obligations whereby all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.
Investment securities The majority of the Companys trading portfolio consists of various marketable securities that are using quoted prices in active markets.
For the nine months ended September 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 nine months ended September 30, 2013 and 2012, the Company did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements 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 managements 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 Natures Sunshine Products, Inc., together with its subsidiaries, as we, us, our, Company or the Company.
OVERVIEW
Natures 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 Natures 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, Iceland, Indonesia, Ireland, Japan, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Moldova, Mongolia, the Netherlands, Nicaragua, Norway, Panama, Peru, the Philippines, Poland, Russia, Singapore, Slovenia, South Korea, Spain, Sweden, Taiwan, Thailand, 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 third quarter of 2013, we experienced an increase in our consolidated net sales of 1.3 percent compared to the third quarter of 2012 (or 2.4 percent in local currencies). NSP Russia, Central and Eastern Europe net sales increased 10.5 percent compared to the same period in 2012, a fourth consecutive quarter of growth. Synergy WorldWide reported a record quarter with net sales increasing 4.0 percent compared to the same period in 2012 (or 4.6 percent in local currencies). NSP Americas, Asia Pacific and Europe net sales decreased 2.4 percent compared to the same period in 2012 (or 0.7 percent in local currencies). Our most significant sales revenue growth was from our NSP Russia, Central and Eastern Europe businesses in the Ukraine, Russia and Belarus, as well as
our Synergy Europe, South Korea and NSP Venezuela markets. Gains in these markets were partially offset by decreases in other markets, principally NSP Japan, NSP United States, Synergy Japan and Synergy North America.
Over the same period, selling, general and administrative expenses as a percentage of net sales revenue increased from 28.8 percent in the prior year to 30.4 percent in the current year as a result of the Companys 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 our products. Typically a person who joins our independent sales force begins as a Distributor. A Distributor may earn Manager status by committing more time and effort to selling our products, recruiting productive Distributors and attaining certain product sales levels. On a worldwide basis, active Managers were approximately 16,900 and 16,900 at September 30, 2013 and 2012, respectively, and active Distributors and customers worldwide were approximately 324,900 and 325,900 at September 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.
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 significantly 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 September 30, 2013 and 2012 (dollar amounts in thousands).
|
|
2013 |
|
2012 |
|
Change from |
| |||||||||
|
|
Total |
|
Percent of |
|
Total |
|
Percent of |
|
|
| |||||
|
|
dollars |
|
net sales |
|
dollars |
|
net sales |
|
Dollar |
|
Percentage |
| |||
Net sales revenue |
|
$ |
92,458 |
|
100.0 |
% |
$ |
91,232 |
|
100.0 |
% |
$ |
1,226 |
|
1.3 |
% |
Cost of sales |
|
(23,655 |
) |
(25.6 |
) |
(23,144 |
) |
(25.4 |
) |
(511 |
) |
(2.2 |
) | |||
|
|
68,803 |
|
74.4 |
|
68,088 |
|
74.6 |
|
715 |
|
1.1 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Volume incentives |
|
33,920 |
|
36.7 |
|
33,155 |
|
36.3 |
|
765 |
|
2.3 |
| |||
SG&A expenses |
|
28,170 |
|
30.4 |
|
26,228 |
|
28.8 |
|
1,942 |
|
7.4 |
| |||
Operating income |
|
6,713 |
|
7.3 |
|
8,705 |
|
9.5 |
|
(1,992 |
) |
(22.9 |
) | |||
Other income (expense), net |
|
(269 |
) |
(0.3 |
) |
(214 |
) |
(0.2 |
) |
(55 |
) |
(25.7 |
) | |||
Income before provision for income taxes |
|
6,444 |
|
7.0 |
|
8,491 |
|
9.3 |
|
(2,047 |
) |
(24.1 |
) | |||
Provision for income taxes |
|
1,594 |
|
1.7 |
|
2,121 |
|
2.3 |
|
(527 |
) |
(24.8 |
) | |||
Net income |
|
$ |
4,850 |
|
5.3 |
% |
$ |
6,370 |
|
7.0 |
% |
$ |
(1,520 |
) |
(23.9 |
)% |
The following table summarizes our unaudited consolidated operating results in U.S. dollars and as a percentage of net sales revenue for the nine months ended September 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 |
|
$ |
282,612 |
|
100.0 |
% |
$ |
277,091 |
|
100.0 |
% |
$ |
5,521 |
|
2.0 |
% |
Cost of sales |
|
(70,730 |
) |
(25.0 |
) |
(69,483 |
) |
(25.1 |
) |
(1,247 |
) |
(1.8 |
) | |||
|
|
211,882 |
|
75.0 |
|
207,608 |
|
74.9 |
|
4,274 |
|
2.1 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Volume incentives |
|
103,420 |
|
36.6 |
|
100,276 |
|
36.2 |
|
3,144 |
|
3.1 |
| |||
SG&A expenses |
|
86,996 |
|
30.8 |
|
79,142 |
|
28.5 |
|
7,854 |
|
9.9 |
| |||
Operating income |
|
21,466 |
|
7.6 |
|
28,190 |
|
10.2 |
|
(6,724 |
) |
(23.9 |
) | |||
Other income (expense), net |
|
1,543 |
|
0.5 |
|
(159 |
) |
(0.1 |
) |
1,702 |
|
1,070.4 |
| |||
Income before provision for income taxes |
|
23,009 |
|
8.1 |
|
28,031 |
|
10.1 |
|
(5,022 |
) |
(17.9 |
) | |||
Provision for income taxes |
|
7,243 |
|
2.5 |
|
7,147 |
|
2.6 |
|
96 |
|
1.3 |
| |||
Net income |
|
$ |
15,766 |
|
5.6 |
% |
$ |
20,884 |
|
7.5 |
% |
$ |
(5,118 |
) |
(24.5 |
)% |
Net Sales Revenue
The following table summarizes the changes in our net sales revenue by operating segment for the three months ended September 30, 2013 and 2012.
|
|
QTD Net Sales Revenue by Operating Segment |
| |||||||||||
|
|
2013 |
|
2012 |
|
Percent |
|
Impact of |
|
Percent |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
NSP Americas, Asia Pacific and Europe: |
|
|
|
|
|
|
|
|
|
|
| |||
NSP North America |
|
$ |
36,582 |
|
$ |
37,775 |
|
(3.2 |
)% |
$ |
(142 |
) |
(2.8 |
)% |
NSP Latin America |
|
12,038 |
|
11,392 |
|
5.7 |
|
(491 |
) |
10.0 |
| |||
NSP Asia Pacific and Europe |
|
1,940 |
|
2,616 |
|
(25.8 |
) |
(225 |
) |
(17.2 |
) | |||
|
|
50,560 |
|
51,783 |
|
(2.4 |
) |
(858 |
) |
(0.7 |
) | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
NSP Russia, Central and Eastern Europe |
|
$ |
14,577 |
|
$ |
13,187 |
|
10.5 |
% |
$ |
5 |
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
| |||
Synergy WorldWide: |
|
|
|
|
|
|
|
|
|
|
| |||
Synergy North America |
|
$ |
4,238 |
|
$ |
4,547 |
|
(6.8 |
)% |
$ |
|
|
(6.8 |
)% |
Synergy Asia Pacific |
|
15,724 |
|
15,177 |
|
3.6 |
|
(578 |
) |
7.4 |
| |||
Synergy Europe |
|
7,359 |
|
6,538 |
|
12.6 |
|
433 |
|
5.9 |
| |||
|
|
27,321 |
|
26,262 |
|
4.0 |
|
(145 |
) |
4.6 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
$ |
92,458 |
|
$ |
91,232 |
|
1.3 |
% |
$ |
(998 |
) |
2.4 |
% |
The following table summarizes the changes in our net sales revenue by operating segment for the nine months ended September 30, 2013 and 2012.
|
|
YTD Net Sales Revenue by Operating Segment |
| |||||||||||
|
|
2013 |
|
2012 |
|
Percent |
|
Impact of |
|
Percent |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
NSP Americas, Asia Pacific and Europe: |
|
|
|
|
|
|
|
|
|
|
| |||
NSP North America |
|
$ |
115,663 |
|
$ |
116,770 |
|
(0.9 |
)% |
$ |
(208 |
) |
(0.8 |
)% |
NSP Latin America |
|
36,016 |
|
34,845 |
|
3.4 |
|
(830 |
) |
5.7 |
| |||
NSP Asia Pacific and Europe |
|
5,434 |
|
7,639 |
|
(28.9 |
) |
(600 |
) |
(21.0 |
) | |||
|
|
157,113 |
|
159,254 |
|
(1.3 |
) |
(1,638 |
) |
(0.3 |
) | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
NSP Russia, Central and Eastern Europe |
|
$ |
45,695 |
|
$ |
41,986 |
|
8.8 |
% |
$ |
13 |
|
8.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
| |||
Synergy WorldWide: |
|
|
|
|
|
|
|
|
|
|
| |||
Synergy North America |
|
$ |
13,007 |
|
$ |
14,336 |
|
(9.3 |
)% |
$ |
|
|
(9.3 |
)% |
Synergy Asia Pacific |
|
42,994 |
|
40,839 |
|
5.3 |
|
(938 |
) |
7.6 |
| |||
Synergy Europe |
|
23,803 |
|
20,676 |
|
15.1 |
|
629 |
|
12.1 |
| |||
|
|
79,804 |
|
75,851 |
|
5.2 |
|
(309 |
) |
5.6 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
$ |
282,612 |
|
$ |
277,091 |
|
2.0 |
% |
$ |
(1,934 |
) |
2.7 |
% |
Consolidated net sales revenue for the three and nine months ended September 30, 2013 was $92.5 million and $282.6 million compared to $91.2 million and $277.1 million for the same periods in 2012, increases of approximately 1.3 percent and 2.0 percent, respectively. We experienced a $1.0 million and $1.9 million unfavorable impact in foreign currency exchange rate fluctuations in the three and nine months ended September 30, 2013, respectively, and our consolidated net sales revenue would have increased by 2.4 percent and 2.7 percent from 2012 excluding the negative impact, respectively. The increase in net sales revenue for the three and nine months ended September 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 and Synergy WorldWide segments and was partially offset by a decline of net sales in our NSP Americas, Asia Pacific and Europe segment.
NSP Americas, Asia Pacific and Europe
Net sales revenue related to NSP Americas, Asia Pacific and Europe for the three and nine months ended September 30, 2013 was $50.6 million and $157.1 million, respectively, compared to $51.8 million and $159.3 million for the same periods in 2012, or decreases of 2.4 percent and 1.3 percent, respectively, in 2013 compared to 2012. Fluctuations in foreign exchange rates had a $0.9 million and $1.6 million unfavorable impact on net sales for the three and nine months ended September 30, 2013, respectively, and net sales revenue would have decreased by 0.7 percent and 0.3 percent from the same periods in 2012 excluding this negative impact. Active Managers within NSP Americas, Asia Pacific and Europe totaled approximately 8,500 and 8,800 at September 30, 2013 and 2012, respectively. Active Distributors and customers within NSP Americas, Asia Pacific and Europe totaled approximately 153,200 and 159,600 at September 30, 2013 and 2012, respectively. Managers and Distributors within NSP Americas, Asia Pacific and Europe are predominantly practitioners, retailers and consumers of our products. Segment net sales revenue and the number of Distributors and customers decreased primarily due to lower sales in Japan and the United States and were partially offset by increased sales in Mexico and Venezuela. The Active Managers category 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. The Active Distributors and customers category 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 decreased approximately $0.7 million and $0.5 million, or 2.2 percent and 0.5 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. While we continue to see improvement in key sequential business metrics, we have not consistently returned to prior year levels. We continue to stabilize the U.S. business and pursue a return to growth through continued 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 $0.3 million and $1.1 million, or 18.2 percent and 22.8 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 40.1 percent and 41.1 percent, respectively, compared to the same periods in 2012. Due to Venezuelas highly inflationary
currency, fluctuations in foreign exchange rates had a $0.4 million and $0.9 million unfavorable impact on net sales for the three and nine months ended September 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 $0.3 million and $0.4 million, or 11.1 percent and 5.7 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 8.9 percent and 1.2 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.1 and $0.4 million favorable impact on net sales for the three and nine months ended September 30, 2013, respectively. Investment in local sales and marketing initiatives, including hiring a new General Manager for the market who started on April 1, 2013, resulted in a return to growth in net sales revenues in the third quarter of 2013. We have launched a new energy drink and weight management program into the market in September and will continue to invest in the efficiency and effectiveness of our distribution infrastructure.
In Japan, net sales revenues decreased approximately $0.9 million and $2.1 million, or 53.1 percent and 46.3 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales decreased 41.0 percent and 34.6 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.2 and $0.5 million unfavorable impact on net sales for the three and nine months ended September 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 nine months ended September 30, 2013 was $14.6 million and $45.7 million, respectively, compared to $13.2 million and $42.0 million for the same periods in 2012, an increase of 10.5 percent and 8.8 percent, respectively. Fluctuations in foreign exchange rates had a nominally favorable impact on net sales for the three and nine months ended September 30, 2013. Active Managers within NSP Russia, Central and Eastern Europe totaled approximately 5,200 and 5,000 at September 30, 2013 and 2012, respectively. Active Distributors and customers within NSP Russia, Central and Eastern Europe totaled approximately 119,400 and 112,900 at September 30, 2013 and 2012, respectively. NSP Russia, Central and Eastern Europes business model is more oriented to a network marketing approach than that of NSP Americas, Asia Pacific and Europe. Net sales increased year-over-year for the fourth 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. In addition, we launched a new weight management program at our annual regional convention in September.
Synergy WorldWide
Net sales revenue related to Synergy WorldWide for the three and nine months ended September 30, 2013 was $27.3 million and $79.8 million, respectively, compared to $26.3 million and $75.9 million for the same periods in 2012, an increase of 4.0 percent and 5.2 percent, respectively. Fluctuations in foreign exchange rates had a $0.1 million and $0.3 million unfavorable impact on net sales for the three and nine months ended September 30, 2013, respectively, and net sales revenue would have increased by 4.6 percent and 5.6 percent from 2012 excluding the negative impact, respectively. Active Managers within Synergy WorldWide totaled approximately 3,200 and 3,100 at September 30, 2013 and 2012, respectively. Active Distributors and customers within Synergy WorldWide totaled approximately 52,300 and 53,400 at September 30, 2013 and 2012, respectively. Synergy WorldWides business model is operating under a traditional network marketing approach. Synergy WorldWide reported a record quarter for net sales revenue, with the increase primarily due to performance in Europe and South Korea, partially offset by lower net sales in North America. In Japan, negative foreign currency fluctuations of $1.4 million also adversely impacted reported net sales revenue for the nine months ended September 30, 2013.
In Europe, net sales revenues increased approximately $0.8 million and $3.1 million, or 12.6 percent and 15.1 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 5.9 percent and 12.1 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.4 and $0.6 million favorable impact on net sales for the three and nine months ended September 30, 2013, respectively. Strong Distributor leadership in recruiting and training efforts continues to effectively build our Distributor base thereby driving increased market penetration, supported by our investment in strengthening our sales and marketing organization across the region.
In South Korea, net sales revenues increased approximately $1.7 million and $2.0 million, or an increase of 21.9 percent and 9.3 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 19.1 percent and 6.3 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.2 and $0.6 million favorable impact on net sales for the three and nine months ended September 30, 2013,
respectively. During the second quarter, programs were implemented with the aim of restoring recruiting activity, which had a positive impact in the third quarter. In addition, Distributor activity was stimulated ahead of the Synergy WorldWide global summit, which was held in South Korea in late September, where the SLMsmart weight-management program was launched. This program will be rolled out to other markets around the world throughout 2014.
In Japan, net sales revenues decreased approximately $0.4 million and $1.4 million, or 14.7 percent and 18.2 percent, for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. In local currency, net sales increased 6.6 percent and decreased 0.5 percent, respectively, compared to the same periods in 2012. Fluctuations in foreign exchange rates had a $0.6 and $1.4 million unfavorable impact on net sales for the three and nine months ended September 30, 2013, respectively. Programs implemented to stimulate activity and growth have begun to yield positive results in the third quarter. However, we will continue to see some fluctuations in our net sales revenue as we reach sustained growth.
In North America, net sales revenues decreased approximately $0.3 million and $1.3 million, or 6.8 percent and 9.3 percent, for the three and nine months ended September 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 the SLMsmart 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 remained relatively stable at 25.6 percent and 25.0 percent for the three and nine months ended September 30, 2013, respectively, compared to 25.4 percent and 25.1 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 36.7 percent and 36.6 percent for the three and nine months ended September 30, 2013, respectively, compared to 36.3 and 36.2 percent for 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 $1.9 million and $7.9 million to $28.2 million and $87.0 million for the three and nine months ended September 30, 2013, respectively. Selling, general and administrative expenses were 30.4 percent and 30.8 percent of net sales revenue for the three and nine months ended September 30, 2013, respectively, compared to 28.8 percent and 28.5 percent for the same periods in 2012.
Significant increases to selling, general and administrative expenses during the three and nine months ended September 30, 2013, compared to the same period in 2012 included:
· $1.2 and $3.8 million of increased compensation and other benefit costs as a result of the Companys 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 (Expense), Net
Other income (expense), net for the three and nine months ended September 30, 2013 decreased to expense of $0.3 million and increased to income of $1.5 million, respectively, compared to the same periods in 2012. The increase in other income (expense), net for the nine months ended September 30, 2013 was primarily due to increased foreign exchange rate gains on United States Dollar denominated cash balances held in foreign markets.
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 September 30, 2013 and 2012, the Companys provision for income taxes, as a percentage of income before income taxes was 24.7 percent and 25.0 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the nine months ended September 30, 2013 and 2012, the Companys provision for income taxes, as a percentage of income before income taxes was 31.5 percent and 25.5 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 September 30, 2013 was primarily attributed to foreign tax credit benefits (-12.7 percent), net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-17.4 percent), offset by an increase in tax liabilities associated with uncertain tax positions (18.8 percent).
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.8 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 (-4.2 percent).
The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2013 was primarily attributed to foreign tax credit benefits (-4.3 percent), net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-5.9 percent), offset by an increase in tax liabilities associated with uncertain tax positions (6.4 percent).
The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.5 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 (-4.0 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 Companys 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 Companys U.S. federal income tax returns for 2009 through 2012 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 Companys U.S. federal income tax returns for the 2009 through 2011 tax years.
As of September 30, 2013, the Company had accrued $11,486 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 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 Companys 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 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 nine months ended September 30, 2013 and 2012, by business segment (in thousands).
|
|
Three Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
| ||||||
NSP Americas, Asia Pacific and Europe: |
|
|
|
|
|
|
|
|
| ||
Herbal products |
|
$ |
29,372 |
|
58.1 |
% |
$ |
28,888 |
|
55.8 |
% |
Vitamin, mineral and other nutritional supplements |
|
19,102 |
|
37.8 |
|
20,379 |
|
39.4 |
| ||
Personal care products |
|
1,179 |
|
2.3 |
|
1,560 |
|
3.0 |
| ||
Other products |
|
907 |
|
1.8 |
|
956 |
|
1.8 |
| ||
|
|
50,560 |
|
100.0 |
% |
51,783 |
|
100.0 |
% | ||
|
|
|
|
|
|
|
|
|
| ||
NSP Russia, Central and Eastern Europe: |
|
|
|
|
|
|
|
|
| ||
Herbal products |
|
$ |
6,656 |
|
45.7 |
% |
$ |
5,834 |
|
44.2 |
% |
Vitamin, mineral and other nutritional supplements |
|
6,854 |
|
47.0 |
|
5,954 |
|
45.2 |
| ||
Personal care products |
|
1,016 |
|
7.0 |
|
1,354 |
|
10.3 |
| ||
Other products |
|
51 |
|
0.3 |
|
45 |
|
0.3 |
| ||
|
|
14,577 |
|
100.0 |
% |
13,187 |
|
100.0 |
% | ||
|
|
|
|
|
|
|
|
|
| ||
Synergy WorldWide: |
|
|
|
|
|
|
|
|
| ||
Herbal products |
|
$ |
9,520 |
|
34.9 |
% |
$ |
10,005 |
|
38.1 |
% |
Vitamin, mineral and other nutritional supplements |
|
15,967 |
|
58.4 |
|
14,510 |
|
55.3 |
| ||
Personal care products |
|
1,471 |
|
5.4 |
|
1,394 |
|
5.3 |
| ||
Other products |
|
363 |
|
1.3 |
|
353 |
|
1.3 |
| ||
|
|
27,321 |
|
100.0 |
% |
26,262 |
|
100.0 |
% | ||
|
|
|
|
|
|
|
|
|
| ||
Consolidated: |
|
|
|
|
|
|
|
|
| ||
Herbal Products |
|
$ |
45,548 |
|
49.3 |
% |
$ |
44,727 |
|
49.0 |
% |
Vitamin, Mineral and Other Nutritional Supplements |
|
41,923 |
|
45.3 |
|
40,843 |
|
44.8 |
| ||
Personal Care Products |
|
3,666 |
|
4.0 |
|
4,308 |
|
4.7 |
| ||
Other Products |
|
1,321 |
|
1.4 |
|