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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 March 31, 2014

 

OR

 

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

 

For the transition period from                to             .

 

Commission File Number: 0-8707

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

 

2500 West Executive Parkway, Suite 100

Lehi, Utah 84043

(Address of principal executive offices and zip code)

 

(801) 341-7900

(Registrant’s telephone number including area code)

 

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

 

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

 

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

 

 

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 April 30, 2014 was 16,184,392 shares.

 

 

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NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended March 31, 2014

 

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Part I. Financial Information
	Item 1.	Financial Statements (Unaudited)	4
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Operations	5
		Condensed Consolidated Statements of Comprehensive Income	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
	Item 4.	Controls and Procedures	32
Part II. Other Information
	Item 1.	Legal Proceedings	32
	Item 1A.	Risk Factors	32
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
	Item 3.	Default Upon Senior Securities	32
	Item 4.	Mine Safety Disclosures	33
	Item 5.	Other Information	33
	Item 6.	Exhibits	33

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information included or incorporated herein by reference in this report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. For example, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are more fully described in this report, including the risks set forth under “Risk Factors” in Item 1A, is included from time to time in our reports filed with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2013, particularly under the captions “Forward-Looking Statements” and “Risk Factors.” but include the following:

 

·             any negative consequences resulting from the economy, including the availability of liquidity to us, our Distributors and our suppliers or the willingness of our customers to purchase products;

·             our relationship with, and our ability to influence the actions of, our Distributors, and other third parties with whom we do business;

·             improper action by our employees or Distributors;

·             negative publicity related to our products or direct selling organization;

·             changing consumer preferences and demands;

·             our reliance upon, or the loss or departure of any member of, our senior management team which could negatively impact our Distributor relations and operating results;

·             the competitive nature of our business;

·             regulatory matters governing our products, our direct selling program, or the direct selling market in which we operate;

·             legal challenges to our direct selling program;

·             risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation, disruptions or conflicts with our third party importers, pricing and currency devaluation risks, especially in countries such as Venezuela, Ukraine, Russia and Belarus;

·             uncertainties relating to the application of transfer pricing, duties, value-added taxes, and other tax regulations, and changes thereto;

·             our dependence on increased penetration of existing markets;

·             our reliance on our information technology infrastructure;

·             the sufficiency of trademarks and other intellectual property rights;

·             changes in tax laws, treaties or regulations, or their interpretation;

·             taxation relating to our Distributors;

·             product liability claims;

·             share price volatility related to, among other things, speculative trading.

 

All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report.  Throughout this report, we refer to Nature’s Sunshine Products, Inc., together with its subsidiaries, as “we,” “us,” “our Company” or “the Company.”

 

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PART I FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

 

		March 31, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents		$	71,467		$	77,247
Accounts receivable, net of allowance for doubtful accounts of $1,102 and $1,087, respectively		11,498			10,206
Investments available for sale		2,012			2,006
Inventories		41,106			41,910
Deferred income tax assets		5,495			5,711
Prepaid expenses and other		13,533			11,514
Total current assets		145,111			148,594
Property, plant and equipment, net		35,283			32,022
Investment securities		1,004			971
Intangible assets, net		816			853
Deferred income tax assets		13,967			9,928
Other assets		7,502			7,244
		$	203,683		$	199,612
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	5,174		$	5,664
Accrued volume incentives		20,733			19,206
Accrued liabilities		30,341			34,893
Deferred revenue		4,231			4,173
Current installments of long-term debt and revolving credit facility		1,420			2,267
Income taxes payable		1,432			2,366
Total current liabilities		63,331			68,569
Liability related to unrecognized tax benefits		12,349			12,402
Long-term debt and revolving credit facility		10,000			10,000
Deferred compensation payable		1,004			971
Other liabilities		2,418			2,411
Total long-term liabilities		25,771			25,784
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value, 50,000 shares authorized, 16,179 and 16,179 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively		84,216			83,122
Retained earnings		44,147			36,100
Accumulated other comprehensive loss		(13,782		)	(13,963		)
Total shareholders’ equity		114,581			105,259
		$	203,683		$	199,612

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

		Three Months Ended March 31,
		2014			2013
Net sales revenue		$	95,753		$	96,479
Cost of sales		(23,106		)	(24,445		)
Gross profit		72,647			72,034
Operating expenses:
Volume incentives		35,717			34,975
Selling, general and administrative		29,758			30,117
Operating income		7,172			6,942
Other income (loss), net		(1,115		)	330
Income before provision for income taxes		6,057			7,272
Provision (benefit) for income taxes		(3,608		)	2,408
Net income		$	9,665		$	4,864
Basic and diluted net income per common share
Basic:
Net income		$	0.60		$	0.31
Diluted:
Net income		$	0.58		$	0.30
Weighted average basic common shares outstanding		16,179			15,822
Weighted average diluted common shares outstanding		16,618			15,956
Dividends declared per common share		$	0.10		$	0.10

 

See accompanying notes to condensed consolidated financial statements.

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands, except per share information)

(Unaudited)

 

		Three Months Ended March 31,
		2014			2013
Net income		$	9,665		$	4,864
Foreign currency translation gain (loss) (net of tax)		178			(1,886		)
Net unrealized gains on investment securities (net of tax)		3			24
Total comprehensive income		$	9,846		$	3,002

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	9,665		$	4,864
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		39			(25		)
Depreciation and amortization		1,237			1,088
Share-based compensation expense		1,094			1,148
Loss on sale of property and equipment		13			11
Deferred income taxes		(3,823		)	235
Amortization of bond discount		1			1
Purchase of trading investment securities		(67		)	(19		)
Proceeds from sale of trading investment securities		49			105
Realized and unrealized gains on investments		(15		)	(21		)
Foreign exchange losses (gains)		980			(416		)
Changes in assets and liabilities:
Accounts receivable		(1,170		)	(555		)
Inventories		707			1,716
Prepaid expenses and other current assets		(2,011		)	(658		)
Other assets		(390		)	83
Accounts payable		(274		)	(943		)
Accrued volume incentives		1,513			2,206
Accrued liabilities		(6,156		)	262
Deferred revenue		58			(740		)
Income taxes payable		(940		)	(516		)
Liability related to unrecognized tax benefits		(53		)	38
Deferred compensation payable		33			(41		)
Net cash provided by operating activities		490			7,823
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(4,614		)	(1,165		)
Proceeds from sale of property, plant and equipment		—			8
Purchase of investments available for sale		(6		)	(83		)
Proceeds from investments available for sale		33			—
Net cash used in investing activities		(4,587		)	(1,240		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends		—			(1,583		)
Principal payments of long-term debt and revolving credit facility		(847		)	(834		)
Proceeds from the exercise of stock options		—			633
Net cash used in financing activities		(847		)	(1,784		)
Effect of exchange rates on cash and cash equivalents		(836		)	(1,004		)
Net decrease in cash and cash equivalents		(5,780		)	3,795
Cash and cash equivalents at the beginning of the period		77,247			79,241
Cash and cash equivalents at the end of the period		$	71,467		$	83,036
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	2,236		$	3,282
Cash paid for interest		30			20

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share information)

(Unaudited)

 

(1)                     Basis of Presentation

 

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

 

The Company markets its products in Australia, Austria, Belarus, Canada, Colombia, Costa Rica, the Czech Republic, Denmark, the Dominican Republic, Ecuador, El Salvador, Finland, Germany, Guatemala, Honduras, Hong Kong, Iceland, Indonesia, Ireland, Italy, 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, Ukraine, the United Kingdom, the United States, Venezuela and Vietnam. The Company also exports its products to Argentina, Australia, Chile, Israel, New Zealand and Norway.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial information as of March 31, 2013, and for the three-month period ended March 31, 2014 and 2013.  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, 2014.

 

It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

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

 

Since January 1, 2010, Venezuela has been designated as a highly inflationary economy. Accordingly, the U.S. dollar became the functional currency for the Company’s subsidiary in Venezuela. On February 11, 2013, the Venezuelan government’s currency control agency (“CADIVI”), announced the further devaluation of the bolivar to 6.3 bolivars per U.S. dollar. In addition, the CADIVI enacted a new currency exchange mechanism, the First Complementary System for Foreign Currency Administration (“SICAD 1”), and mandated foreign entities domiciled in Venezuela to formally apply and be approved by the CADIVI to obtain U.S. dollars through banking institutions approved by the Venezuelan government at the official CADIVI exchange rate of 6.3 bolivars per U.S. dollar or at the official SICAD 1 exchange rate of 11.3 bolivars per U.S. dollar. On a weekly basis, the CADIVI determined how many U.S. dollars would be sold and which previously approved companies would be authorized to obtain them. Companies were approved to obtain U.S. dollars based on the individual products that they imported and sold in Venezuela. Products that are considered to be more beneficial to consumers in Venezuela, such as medicinal products, were approved for payment at the official CADIVI exchange rate of 6.3 while other beneficial products, such as dietary supplements, were approved for payment at the official SICAD 1 exchange rate of 11.3.  Foreign entities domiciled in Venezuela pay bolivars to the Venezuela Central Bank, which then pays U.S. dollars directly to the foreign entities to limit the amount of U.S. dollars available within Venezuela.  The Company is currently in the process of registering its products in order to obtain U.S. dollars at the official CADAVI exchange rate of 6.3 or the official SICAD 1 exchange rate of 11.3. The Company has not successfully obtained U.S. dollars at the CADIVI or SICAD 1 exchange rates since the establishment of the SICAD 1 currency exchange mechanism.

 

Effective January 24, 2014, additional changes to the country’s foreign exchange system were enacted by the Venezuelan government that expanded the types of products that could be subject to the weekly SICAD 1 auction process. In addition, a new currency control agency (“CENCOEX”) was established to replace the CADIVI. The CENCOEX official exchange rate was maintained at the CADIVI official exchange rate 6.3 bolivars per U.S. dollar. The CENCOEX also enacted a new currency exchange mechanism, the Second Complementary System for Foreign Currency Administration (“SICAD 2”) that will supplement and coexist with the SICAD 1 currency exchange mechanism. The SICAD 2 is expected to provide a greater supply of U.S. dollars from sources

 

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other than the Venezuelan government and to allow all sectors and companies to participate. The SICAD 2 is intended to more closely resemble a market-driven exchange rate than the official CENCOEX and SICAD 1 exchange rates of 6.3 and 11.3, respectively. As of March 31, 2014, the SICAD 2 exchange rate was approximately 50.0 bolivars per U.S. dollar.

 

The Company does not intend to apply for exchange or register any products at the SICAD 2 exchange rate. The Company is currently monitoring the currency exchange mechanisms in place and the potential for currency exchange transactions should the Company’s applications for currency exchange be unsuccessful. At this time, the Company is uncertain of the process or exchange rate for obtaining U.S. dollars for previously shipped products dating back to the establishment of the SICAD 1 currency exchange mechanism in February 2013.

 

Due to these circumstances, the Company has re-measured its assets and liabilities in Venezuela at the official SICAD 1 exchange rate of 11.3, effective March 31, 2014. This re-measurement resulted in a foreign exchange loss of $845. Going forward the Company will report its results at the higher official exchange rate of 11.3 bolivars to the U.S. dollar.

 

During the three months ended March 31, 2014 and 2013, the Company’s Venezuelan subsidiary’s net sales revenue represented approximately 2.4 percent and 2.2 percent of consolidated net sales revenue, respectively.  As of March 31, 2014 and December 31, 2013, the Company’s Venezuelan subsidiary held cash and cash equivalents of $2,585 and $3,922, respectively.

 

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

 

Since June 30, 2012, Belarus has been designated as a highly inflationary economy. The U.S. dollar is the Company’s functional currency for this market. As a result, there were no resulting gains or losses from a re-measurement of the financial statements using official rates of the Company’s Belarusian subsidiary.  However, as a result of the weakening of the Belarusian ruble, the purchasing power of the Company’s Distributors in this market has diminished. During the three months ended March 31, 2014 and 2013, the Company’s Belarusian subsidiary’s net sales revenue represented approximately 2.5 percent and 2.3 percent of consolidated net sales revenue, respectively.

 

(2)                     Inventories

 

The composition of inventories is as follows:

 

		March 31,			December 31,
		2014			2013
Raw materials		$	11,310		$	10,848
Work in progress		759			740
Finished goods		29,037			30,322
Total inventory		$	41,106		$	41,910

 

(3)                     Intangible Assets

 

At March 31, 2014 and December 31, 2013, intangibles for product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $947 and $910, and a net amount of $816 and $853, 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 March 31, 2014 and 2013 was $37 and $37, respectively. Estimated amortization expense for the next succeeding fiscal year thereafter is $149 followed by four fiscal years with estimated amortization expense of $91.

 

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(4)                     Investments

 

The amortized cost and estimated fair values of available-for-sale securities by balance sheet classification are as follows:

 

As of March 31, 2014		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Municipal obligations		$	402		$	8		$	—		$	410
U.S. government securities funds		999			—			(14		)	985
Equity securities		227			397			(7		)	617
Total short-term investment securities		$	1,628		$	405		$	(21	)	$	2,012

 

As of December 31, 2013		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Municipal obligations		$	403		$	12		$	—		$	415
U.S. government securities funds		997			—			(14		)	983
Equity securities		227			386			(5		)	608
Total short-term investment securities		$	1,627		$	398		$	(19	)	$	2,006

 

The municipal obligations held at a fair value of $410 at March 31, 2014, all mature in less than two years.

 

During the three-month periods ended March 31, 2014 and 2013, the proceeds from the sales of available-for-sale securities were $33 and $0, respectively. There were no gross realized gains (losses) on sales of available-for-sale securities (net of tax) for the three-month periods ended March 31, 2014 and 2013, respectively.

 

The Company’s trading securities portfolio totaled $1,004 at March 31, 2014, and $971 at December 31, 2013, and generated gains of $15 and $45 for the three months ended March 31, 2014 and 2013.

 

As of March 31, 2014 and December 31, 2013, the Company had unrealized losses of $14 and $14, 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 March 31, 2014 and December 31, 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 the borrowing limit to $25,000 and extend the maturity to September 1, 2015.  At March 31, 2014, 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 March 31, 2014, and December 31, 2013). As of March 31, 2014, the outstanding balance under the term loan was $1,420. The term loan is collateralized by the Company’s manufacturing facility in Spanish Fork, Utah.

 

Long-term debt consists of the following:

 

		March 31, 2014			December 31, 2013
Term loan in monthly installments of approximately $284, including interest		$	1,420		$	2,267
Less current installments		(1,420		)	(2,267		)
		—			—
Revolving credit agreement		10,000			10,000
Long-term debt less current installments		$	10,000		$	10,000

 

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The various debt agreements contain restrictions on liquidity, leverage, 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 March 31, 2014.

 

(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.

 

Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three months ended March 31, 2014 and 2013:

 

		Three Months Ended March 31,
		2014			2013
Net income		$	9,665		$	4,864
Basic weighted average shares outstanding		16,179			15,822
Basic net income per common share		$	0.60		$	0.31
Diluted shares outstanding
Basic weighted average shares outstanding		16,179			15,822
Stock options		439			134
Diluted weighted average shares outstanding		16,618			15,956
Diluted net income per common share		$	0.58		$	0.30
Potentially dilutive shares excluded from diluted per share amounts:
Stock options		134			45
Potentially anti-dilutive shares excluded from diluted per share amounts:
Stock options		210			1,124

 

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 each of the years presented.

 

(7)                     Capital Transactions

 

Dividends

 

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

 

On March 17, 2014, the Company announced a cash dividend of $0.10 per common share in an aggregate amount of $1,618 that was paid on April 7, 2014 to shareholders of record on March 28, 2014. Dividends payable of $1,618 was included in accrued liabilities as of March 31, 2014.

 

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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 Company’s evaluation of market conditions and other factors and the program may be discontinued or suspended at any time. There were no share repurchases during the three months ended March 31, 2014. At March 31, 2014, the remaining balance available for repurchases under the program was $7,454.

 

Share-Based Compensation

 

Stock option activity for the three months ended March 31, 2014, is as follows:

 

		Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2013		1,926		$	12.54
Granted		258		15.38
Expired		(9	)	13.58
Exercised		—		—
Options outstanding at March 31, 2014		2,175		12.87

 

The Company’s outstanding stock options include time-based stock options, which vest over differing periods ranging from the date of issuance up to 48 months from the option grant date; performance-based stock options, which have already vested 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 three-month period ended March 31, 2014, the Company issued options to purchase 258 shares of common stock under the 2012 Stock Incentive Plan to the Company’s executive officers and other employees, which are composed of time-based stock options. These options were issued with a weighted-average exercise price of $15.38 per share and a weighted-average grant date fair value of $6.53 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 three-month period ended March 31, 2014:

 

		2014
Expected life (in years)		6.0
Risk-free interest rate		1.5
Expected volatility		56.7
Dividend yield		2.6

 

Expected option lives and volatilities are based on historical data of the Company. The risk free interest rate is calculated as the average U.S. Treasury bill rate that corresponds with the option life.  The dividend yield is based on the Company’s historical and expected amount of dividend payouts, at the time of grant. On August 29, 2013, the Company paid a special one-time cash dividend of $1.50 per common share. The Company has excluded this special one-time cash dividend from the dividend yield used in the Black-Scholes option-pricing model calculations as it is not representative of future dividends to be declared by the Company.

 

Share-based compensation expense from time-based stock options for the three-month periods ended March 31, 2014 and 2013 was approximately $897 and $1,074, respectively; the related tax benefit was approximately $354 and $424, respectively. As of March 31, 2014 and December 31, 2013, the unrecognized share-based compensation expense related to the grants described above was $4,019 and $3,294, respectively. As of March 31, 2014, the remaining compensation cost is expected to be recognized over the weighted-average period of approximately 2.1 years.

 

The Company has not recognized any share-based compensation expense related to the net sales revenue performance-based stock options for the three-month period ended March 31, 2014.  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 $800 of potential share-based compensation expense.

 

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At March 31, 2014, the aggregate intrinsic value of outstanding stock options to purchase 2,175 shares of common stock, exercisable stock options to purchase 1,017 shares of common stock and stock options to purchase 972 shares of common stock that are expected to vest was $3,492, $3,280 and $201, respectively. At December 31, 2013, the aggregate intrinsic value of outstanding options to purchase 1,926 shares of common stock, the exercisable options to purchase 838 shares of common stock, and options to purchase 905 shares of common stock expected to vest was $9,415, $6,069 and $3,179, respectively.

 

Restricted stock unit activity for the period ended March 31, 2014 is as follows:

 

		Number of Shares		Weighted Average Grant Date Fair Value
Units outstanding at December 31, 2013		32		$	12.47
Granted		118		14.33
Issued		—		—
Forfeited		—		—
Units outstanding at March 31, 2014		150		13.72

 

During the three-month period ended March 31, 2014, the Company issued 118 restricted stock units (RSUs) of common stock under the 2012 Incentive Plan to the Company’s executive officers and other employees. The RSUs were issued with a weighted average grant date fair value of $14.33 per share and vest in annual installments over a four year period from the grant date.

 

RSUs are valued at the market value on the date of grant.  For RSUs with post-vesting restrictions, a Finnerty Model was utilized to calculate a valuation discount from the market value of common shares reflecting the restriction embedded in the RSUs preventing the sale of the underlying shares over a certain period of time. The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. This model has gained recognition through its ability to address the magnitude of the discount by considering the volatility of a company’s stock price and the length of restriction. The concept underpinning the Finnerty Model is that restricted stock cannot be sold over a certain period of time. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model discount for lack of marketability is approximately 17.5 percent for a common share.

 

Share-based compensation expense from RSUs for the periods ended March 31, 2014 and 2013 was approximately $197 and $74, respectively; the related tax benefit was approximately $78 and $29, respectively. As of March 31, 2014 and December 31, 2013, the unrecognized share-based compensation expense related to the grants described above was $1,551 and $62, respectively. As of March 31, 2014, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 2.4 years.

 

(8)                     Segment Information

 

The Company has three business segments. These business segments are components of the Company for which separate information is available that is evaluated regularly by the chief executive officer in deciding how to allocate resources and in assessing relative performance.

 

The Company has two business segments that operate under the Nature’s Sunshine Products brand and are divided based on the characteristics of their Distributor base, similarities in compensation plans, as well as the internal organization of NSP’s officers and their responsibilities (NSP Americas, Asia Pacific and Europe and NSP Russia, Central and Eastern Europe). The Company’s third business segment operates under the Synergy WorldWide brand, which distributes its products through different selling and Distributor compensation plans and has products with formulations that are sufficiently different from those of the 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 (loss) by segment before consideration of certain inter-segment transfers and expenses.

 

Reportable business segment information is as follows:

 

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		Three Months Ended March 31,
		2014			2013
Net sales revenue:
NSP Americas, Asia Pacific and Europe		$	50,673		$	53,137
NSP Russia, Central and Eastern Europe		15,037			16,140
Synergy WorldWide		30,043			27,202
Total net sales revenue		95,753			96,479
Contribution margin (1):
NSP Americas, Asia Pacific and Europe		20,921			21,956
NSP Russia, Central and Eastern Europe		5,396			5,983
Synergy WorldWide		10,613			9,120
Total contribution margin		36,930			37,059
Selling, general and administrative		29,758			30,117
Operating income		7,172			6,942
Other income (expense), net		(1,115		)	330
Income before provision for income taxes		$	6,057		$	7,272

 

(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 and South Korea comprise 10 percent or more of consolidated net sales revenue for the three-month periods ended March 31, 2014 and 2013 as follows:

 

		Three Months Ended March 31,
		2014			2013
Net sales revenue:
United States		$	37,615		$	39,148
South Korea		12,371			6,721
Other		45,767			50,610
		$	95,753		$	96,479

 

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

 

		Three Months Ended March 31,
		2014			2013
NSP Americas, Asia Pacific and Europe:
General health		$	21,311		$	22,472
Immune		6,582			6,986
Cardiovascular		3,491			3,435
Digestive		14,911			15,446
Personal care		1,052			1,481
Weight management		3,326			3,317
		50,673			53,137
NSP Russia, Eastern and Central Europe:
General health		$	5,545		$	5,760
Immune		1,968			2,101
Cardiovascular		938			1,138
Digestive		3,947			4,046
Personal care		1,868			2,359
Weight management		771			736
		15,037			16,140
Synergy WorldWide:
General health		$	10,753		$	8,668
Immune		211			392
Cardiovascular		10,444			11,089
Digestive		5,017			4,864
Personal care		1,736			1,742
Weight management		1,882			447
		30,043			27,202
		$	95,753		$	96,479

 

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From an individual country perspective, only the United States and Venezuela comprise 10 percent or more of consolidated property, plant and equipment as follows:

 

		March 31, 2014			December 31, 2013
Property, plant and equipment:
United States		$	29,233		$	25,713
Venezuela		3,130			3,207
Other		2,920			3,102
Total property, plant and equipment		$	35,283		$	32,022

 

(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 March 31, 2014 and 2013, the Company’s provision (benefit) for income taxes, as a percentage of income before income taxes was (59.6) percent and 33.1 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 March 31, 2014 was primarily attributed to foreign tax credits arising from intercompany dividends of $21,500 paid by foreign subsidiaries to the U.S. corporation. This discrete first quarter item resulted in an income tax benefit of $6,720 for the three months ended March 31, 2014.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended March 31, 2013 was primarily attributed to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-9.7 percent), offset, in part, by an increase in tax liabilities associated with uncertain tax positions (7.7 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, although it is unlikely that these items will again have an impact as large as what occurred in the three months ended March 31, 2014. Depending on various factors, changes from the foregoing items may be favorable or unfavorable in a particular period.

 

The Company’s 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 2007 through 2013. The Internal Revenue Service (“IRS”) is currently conducting an audit of the Company’s U.S. federal income tax returns for the 2009 through 2011 tax years.

 

As of March 31, 2014, the Company had accrued $12,349 of liabilities related to unrecognized tax benefits compared with $12,402, as of December 31, 2013. This net decrease was primarily attributed to the Venezuela currency devaluation, partially offset by an increase in transfer pricing contingencies, including increases in penalties and interest.

 

Although the Company believes its estimates are reasonable, the Company can make no assurance 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.  Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.

 

(10)              Commitments and Contingencies

 

Legal Proceedings

 

The Company is party to various legal proceedings. Management cannot predict the ultimate outcome of these proceedings, individually or in the aggregate, or their resulting effect on the Company’s business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations, or

 

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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.

 

Since late 2007, the Company has administered its sales in Belarus, Georgia, Kazakhstan, Moldova, Mongolia, Russia and Ukraine (the “Territories”) through an International Reseller Agreement (“Reseller Agreement”) with a third party general dealer (the “General Dealer”) based in Russia. The General Dealer administers the marketing and distribution of the Company’s products in the Territories.  The Reseller Agreement has a one-year term, which has been renewed annually by the parties, and is set to expire on November 1, 2014.  As a part of its services, the General Dealer provides certain discounts (the “Discounts”) to its network of dealers related to the costs associated with transporting the Company’s products from the General Dealer to the dealers.  In July 2013, the General Dealer began to withhold the amount of these Discounts from the funds remitted each month to the Company for the sale of the products, claiming that it is entitled to reimbursement for these costs under the Reseller Agreement.  These withholdings have averaged approximately $330 per month and totaled approximately $3,000 at March 31, 2014.

 

The parties have negotiated a resolution to the dispute, whereby the General Dealer has agreed to pay the Company the entire sum of Discounts withheld and relinquish all claims to the reimbursement of Discounts with respect to periods prior to July 2013, and the parties have agreed to a new three year international reseller agreement, effective April 1, 2014. The General Dealer has paid the Company all withheld Discounts from July 2013 to present as of May 1, 2014.

 

Non-Income Tax Contingencies

 

The Company has reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. The Company provides provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters, including value-added taxes and sales tax. The Company provides provisions for U.S. state sales taxes in each of the states where the Company has nexus. As of March 31, 2014 and December 31, 2013, accrued liabilities include $5,058 and $6,312, 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 of 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 value-added tax 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 $800.

 

(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:

 

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

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

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

 

The following table presents the Company’s hierarchy for its assets, measured at fair value on a recurring basis, as of March 31, 2014:

 

		Level 1			Level 2			Level 3
		Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs			Total
Investments available-for-sale
Municipal obligations		$	—		$	410		$	—		$	410
U.S. government security funds		985			—			—			985
Equity securities		617			—			—			617
Investment securities		1,004			—			—			1,004
Total assets measured at fair value on a recurring basis		$	2,606		$	410		$	—		$	3,016

 

The following table presents the Company’s hierarchy for its assets, measured at fair value on a recurring basis, as of December 31, 2013:

 

		Level 1			Level 2			Level 3
		Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs			Total
Investments available-for-sale
Municipal obligations		$	—		$	415		$	—		$	415
U.S. government security funds		983			—			—			983
Equity securities		608			—			—			608
Investment securities		971			—			—			971
Total assets measured at fair value on a recurring basis		$	2,562		$	415		$	—		$	2,977

 

Investments available-for-sale — The majority of the Company’s investment portfolio consist of various securities such as state and municipal obligations, U.S. government security funds, short-term deposits and various equity securities.  The Level 1 securities are valued using quoted prices for identical assets in active markets including equity securities and U.S. government treasuries.  The Level 2 securities include investments in state and municipal obligations whereby all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.

 

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

 

For the three months ended March 31, 2014, and for the year ended December 31, 2013, 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 months ended March 31, 2014 and 2013, 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.                            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this report, as well as the consolidated financial statements, the notes thereto, and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2013, and our Reports on Form 8-K filed since the date of such Form 10-K.

 

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

 

OVERVIEW

 

Nature’s Sunshine Products, Inc., together with its subsidiaries, is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. The Company is a Utah corporation with its principal place of business in Lehi, Utah, and sells its products to a sales force of 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, selling and Distributor compensation plans and product formulations, as well as the internal organization of our officers and their responsibilities and business operations.  Two business segments operate under the Nature’s Sunshine Products brand (NSP Americas, Asia Pacific and Europe and NSP Russia, Central and Eastern Europe), and one operates under the Synergy WorldWide brand.

 

We market our products in Australia, Austria, Belarus, Canada, Colombia, Costa Rica, the Czech Republic, Denmark, the Dominican Republic, Ecuador, El Salvador, Finland, Germany, Guatemala, Honduras, Hong Kong, Iceland, Indonesia, Ireland, Italy, 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, 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 first quarter of 2014, we experienced a decrease in our consolidated net sales of 0.8 percent compared to the first quarter of 2013. However, net sales revenue increased by 0.3 percent in local currencies excluding the negative impact of foreign currency fluctuations. Synergy WorldWide net sales increased approximately 10.4 percent compared to the same period in 2013 (or 11.1 percent in local currencies). NSP Russia, Central and Eastern Europe net sales decreased approximately 6.8 percent compared to the same period in 2013.  NSP Americas, Asia Pacific and Europe net sales decreased approximately 4.6 percent compared to the same period in 2013 (or 3.1 percent in local currencies). Our most significant sales revenue growth was from our Synergy South Korea market during 2014. Gains in this market were partially offset by decreases in our NSP Russia, Central and Eastern Europe market and in our North American markets included within our NSP Americas, Asia Pacific and Europe and Synergy WorldWide segments.

 

Despite the robust net sales growth experienced in NSP Russia, Central and Eastern Europe in 2013, the Company must caution that near-term growth will undoubtedly be impacted by the political unrest in Ukraine and Russia. Also, the Company has negotiated a resolution to the contract dispute with its General Dealer, whereby the General Dealer has agreed to pay the Company the entire sum of Discounts withheld and relinquish all claims to the reimbursement of Discounts with respect to periods prior to July 2013, and the parties have agreed to a new international reseller agreement, effective April 1, 2014. The General Dealer has paid the Company all withheld Discounts from July 2013 to present as of May 1, 2014.

 

Over the same period, selling, general and administrative costs as a percentage of net sales revenue for 2014, decreased to 31.1 percent from 31.2 percent in 2013.

 

We distribute our products to consumers through an independent sales force comprised of 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 17,200 and 18,200 and active Distributors and customers were approximately 329,800 and 341,200 at March 31, 2014 and 2013, respectively. The decrease in Managers, Distributors and customers is the result of lower recruiting and retention principally within our NSP Americas, Asia Pacific and Europe segment.

 

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

 

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

 

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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.

 

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 March 31, 2014 and 2013 (dollar amounts in thousands).

 

		Three Months Ended March 31,					Three Months Ended March 31,
		2014					2013					Change
		Total			Percent of		Total			Percent of		Total
		dollars			net sales		dollars			net sales		dollars			Percentage
Net sales revenue		$	95,753		100.0	%	$	96,479		100.0	%	$	(726	)	(0.8	)%
Cost of sales		(23,106		)	(24.1	)	(24,445		)	(25.3	)	1,339			5.5
		72,647			75.9		72,034			74.7		613			0.9
Volume incentives		35,717			37.3		34,975			36.3		742			2.1
SG&A expenses		29,758			31.1		30,117			31.2		(359		)	(1.2	)
Operating income		7,172			7.5		6,942			7.2		230			3.3
Other income (loss), net		(1,115		)	(1.2	)	330			0.3		(1,445		)	(437.9	)
Income before provision for income taxes		6,057			6.3		7,272			7.5		(1,215		)	(16.7	)
Provision (benefit) for income taxes		(3,608		)	(3.8	)	2,408			2.5		(6,016		)	(249.8	)
Net income		$	9,665		10.1	%	$	4,864		5.0	%	$	4,801		98.7	%

 

Net Sales Revenue

 

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.

 

The following table summarizes the changes in our net sales revenue by operating segment with a reconciliation to net sales revenue excluding the impact of currency fluctuations for the three months ended March 31, 2014 and 2013;

 

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