Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

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: 001-34483

 

 

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).

 

Large accelerated filer  o		Accelerated filer  x
Non-accelerated filer  o		Smaller reporting company  o
(Do not check if a smaller reporting company)

 

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

 

The number of shares of Common Stock, no par value, outstanding on April 24, 2015, was 18,710,392 shares.

 

 

Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended March 31, 2015

 

Table of Contents

 

Part I. Financial Information			4
	Item 1.	Financial Statements (Unaudited)	4
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Operations	5
		Condensed Consolidated Statements of Comprehensive Income	6
		Condensed Consolidated Statement of Changes in Stockholders’ Equity	6
		Condensed Consolidated Statements of Cash Flows	7
		Notes to Condensed Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
	Item 4.	Controls and Procedures	37
Part II. Other Information			38
	Item 1.	Legal Proceedings	38
	Item 1A.	Risk Factors	38
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
	Item 3.	Defaults Upon Senior Securities	38
	Item 4.	Mine Safety Disclosures	38
	Item 5.	Other Information	38
	Item 6.	Exhibits	39

 

2

Table of Contents

 

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, but include the following:

 

·             any negative consequences resulting from the economy, including the availability of liquidity to us, our independent 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 independent Distributors, and other third parties with whom we do business;

·             improper activity by our employees or independent Distributors;

·             negative publicity related to our products, ingredients, and the nutritional supplement industry 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;

·            increased state and federal regulatory scrutiny of the dietary supplement industry;

·             the competitive nature of our business and the nutritional supplement industry;

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

·             legal challenges to our direct selling program or to the classification of our independent Distributors;

·             risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation, disruptions or conflicts with our third party importers, governmental sanctions, ongoing Ukraine and Russia political conflict, pricing and currency devaluation risks, especially in countries such as 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 independent Distributors;

·             product liability claims;

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

·             the full implementation of our joint venture for operations in China with Fosun Industrial Co., Ltd., as well as the legal complexities, unique regulatory environment and challenges of doing business in China generally.

 

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.”

 

3

Table of Contents

 

PART I FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

 

		March 31, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents		$	50,065		$	58,699
Accounts receivable, net of allowance for doubtful accounts of $812 and $849, respectively		8,086			6,732
Investments available for sale		2,569			2,546
Inventories		41,928			40,438
Deferred income tax assets		4,901			4,950
Prepaid expenses and other		9,653			7,884
Total current assets		117,202			121,249
Property, plant and equipment, net		56,939			51,343
Investment securities - trading		1,118			1,038
Intangible assets, net		667			704
Deferred income tax assets		14,509			14,495
Other assets		7,862			7,970
		$	198,297		$	196,799
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	8,297		$	5,237
Accrued volume incentives		18,142			16,867
Accrued liabilities		22,336			28,957
Deferred revenue		4,256			4,717
Income taxes payable		1,908			2,131
Revolving credit facility payable		348			—
Total current liabilities		55,287			57,909
Liability related to unrecognized tax benefits		6,776			6,598
Deferred compensation payable		1,118			1,038
Other liabilities		2,334			2,297
Total liabilities		65,515			67,842
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value, 50,000 shares authorized, 18,709 and 18,662 shares issued and outstanding as of March 31, 2015, and December 31, 2014, respectively		125,663			125,489
Retained earnings		14,693			10,891
Noncontrolling interests		3,629			3,781
Accumulated other comprehensive loss		(11,203		)	(11,204		)
Total shareholders’ equity		132,782			128,957
		$	198,297		$	196,799

 

See accompanying notes to condensed consolidated financial statements.

 

4

Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

		Three Months Ended March 31,
		2015			2014
Net sales revenue		$	83,878		$	93,467
Cost of sales		(21,881		)	(22,581		)
Gross profit		61,997			70,886
Operating expenses:
Volume incentives		30,337			34,893
Selling, general and administrative		26,330			29,152
Operating income		5,330			6,841
Other income (loss), net		(318		)	(262		)
Income before provision (benefit) for income taxes		5,012			6,579
Provision (benefit) for income taxes		809			(3,657		)
Net income from continuing operations		4,203			10,236
Income (loss) from discontinued operations		1,312			(571		)
Net income		5,515			9,665
Net loss attributable to noncontrolling interests		(152		)	—
Net income attributable to common shareholders		$	5,667		$	9,665
Basic and diluted net income per common share attributable to common shareholders
Basic:
Net income from continuing operations		$	0.23		$	0.63
Income (loss) from discontinued operations		$	0.07		$	(0.03	)
Net income attributable to common shareholders		$	0.30		$	0.60
Diluted:
Net income from continuing operations		$	0.22		$	0.61
Income (loss) from discontinued operations		$	0.07		$	(0.03	)
Net income attributable to common shareholders		$	0.30		$	0.58
Weighted average basic common shares outstanding		18,621			16,179
Weighted average diluted common shares outstanding		19,192			16,618
Dividends declared per common share		$	0.10		$	0.10

 

See accompanying notes to condensed consolidated financial statements.

 

5

Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2015			2014
Net income		$	5,515		$	9,665
Foreign currency translation gain (loss) (net of tax)		(21		)	178
Net unrealized gains on investment securities (net of tax)		22			3
Total comprehensive income		$	5,516		$	9,846

 

See accompanying notes to condensed consolidated financial statements.

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

 

		Common Stock					Retained			Noncontrolling			Accumulated Other Comprehensive
		Shares		Value			Earnings			Interests			Income (Loss)			Total
Balance at January 1, 2015		18,662		$	125,489		$	10,891		$	3,781		$	(11,204	)	$	128,957
Share-based compensation expense		—		1,339			—			—			—			1,339
Proceeds from the exercise of stock options, and issuance of restricted stock units		249		1,640			—			—			—			1,640
Tax benefit from exercise of stock options		—		52			—			—			—			52
Repurchase of common stock		(202	)	(2,857		)	—			—			—			(2,857		)
Cash dividends (0.10 per share)		—		—			(1,865		)	—			—			(1,865		)
Net income		—		—			5,667			(152		)	—			5,515
Other comprehensive income		—		—			—			—			1			1
Balance at March 31, 2015		18,709		$	125,663		$	14,693		$	3,629		$	(11,203	)	$	132,782

 

See accompanying notes to condensed consolidated financial statements.

 

6

Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	5,515		$	9,665
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		30			39
Depreciation and amortization		996			1,237
Share-based compensation expense		1,339			1,094
Tax benefit from the exercise of stock options		(52		)	—
(Gain) loss on sale of property and equipment		(1,312		)	13
Deferred income taxes		50			(3,823		)
Amortization of bond discount		—			1
Purchase of trading investment securities		(112		)	(67		)
Proceeds from sale of trading investment securities		55			49
Realized and unrealized gains on investments		(46		)	(15		)
Foreign exchange losses		351			980
Changes in assets and liabilities:
Accounts receivable		(1,411		)	(1,170		)
Inventories		(1,989		)	707
Prepaid expenses and other current assets		(1,837		)	(2,011		)
Other assets		74			(390		)
Accounts payable		3,010			(274		)
Accrued volume incentives		1,539			1,513
Accrued liabilities		(6,707		)	(6,156		)
Deferred revenue		(461		)	58
Income taxes payable		(268		)	(940		)
Liability related to unrecognized tax benefits		230			(53		)
Deferred compensation payable		80			33
Net cash provided (used) by operating activities		(926		)	490
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(6,019		)	(4,614		)
Proceeds from sale of property, plant and equipment		1,312			—
Purchase of investments available for sale		(15		)	(6		)
Proceeds from investments available for sale		—			33
Net cash used in investing activities		(4,722		)	(4,587		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of cash dividends		(1,865		)	—
Borrowings on revolving credit facility		348			—
Principal payments of long-term debt and revolving credit facility		—			(847		)
Proceeds from the exercise of stock options		1,640			—
Tax benefit from stock option exercise		52			—
Repurchase of common stock		(2,857		)	—
Net cash used in financing activities		(2,682		)	(847		)
Effect of exchange rates on cash and cash equivalents		(304		)	(836		)
Net decrease in cash and cash equivalents		(8,634		)	(5,780		)
Cash and cash equivalents at the beginning of the period		58,699			77,247
Cash and cash equivalents at the end of the period		$	50,065		$	71,467
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	2,608		$	2,236
Cash paid for interest		25			30

 

See accompanying notes to condensed consolidated financial statements.

 

7

Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share information)

(Unaudited)

 

(1)                     Basis of Presentation

 

Nature’s Sunshine Products, Inc., together with its subsidiaries (hereinafter referred to collectively as the “Company”), is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. 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 independent 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, New Zealand, Nicaragua, Norway, Panama, the Philippines, Poland, Russia, Singapore, Slovenia, South Korea, Spain, Sweden, Taiwan, Thailand, Ukraine, the United Kingdom, the United States and Vietnam. The Company also exports its products to Argentina, Australia, Chile, Israel, New Zealand, Norway, Peru and the United Kingdom. The Company has announced it will discontinue operations in Vietnam, which were approximately 0.3 percent and 0.4 percent of consolidated net sales during the three month periods ended March 31, 2015 and 2014, respectively.

 

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, 2015, and for the three-month periods ended March 31, 2015 and 2014.  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, 2015.

 

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, 2014.

 

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 independent Distributors in this market has diminished. During the three months ended March 31, 2015 and 2014, the Company’s Belarusian subsidiary’s net sales revenue represented approximately 2.1 percent and 2.5 percent of consolidated net sales revenue, respectively.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 Revenue from Contracts with Customers (Topic 606). This update requires an entity to recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. As such, this update affects an entity that either enters into contracts with customers or transfers goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This update will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606. The amendments in this update are effective for interim and annual periods

 

8

Table of Contents

 

beginning after December 15, 2016.  The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements and footnote disclosures.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40). The purpose of this ASU is to incorporate into U.S. GAAP management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued, and to provide related footnote disclosures. This update is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial statements and footnote disclosures.

 

In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” which eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, this ASU will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. This ASU is effective for annual periods ending after December 15, 2015, and interim periods thereafter. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidations (Topic 810): “Amendments to the Consolidation Analysis.” This update makes amendments to the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities will be considered a variable interest entity unless the limited partners hold substantive kick-out rights or participating rights. This update is effective for interim and annual periods beginning after December 15, 2015. The Company is currently evaluating both methods of adoption, as well as the effect this ASU will have on its consolidated financial statements and footnote disclosures.

 

(2)                     Discontinued operations

 

In November 2014, the Company ceased its operations in Venezuela due to the difficulties and uncertainties related to import controls, difficulties associated with repatriating cash and high inflation. This market was part of the Company’s NSP Americas segment and all of the income (loss) from discontinued operations is related to the common shareholders of the Company.

 

The following table summarizes the operating results of the Company’s discontinued operations:

 

		March 31,			March 31,
		2015			2014
Net sales revenue		$	—		$	2,286
Income (loss) before income tax provision		$	1,312		$	(522	)
Income tax provision		—			49
Income (loss) from discontinued operations		$	1,312		$	(571	)

 

During the three months ended March 31, 2015, the Company received $1,312 in net proceeds from the sales of its fixed assets in Venezuela, which is included in the results from discontinued operations. The income (loss) from discontinued operations did not have a material impact on the Company’s operating cash flows during the three months ended March 31, 2014.

 

(3)                     Inventories

 

The composition of inventories is as follows:

 

		March 31,			December 31,
		2015			2014
Raw materials		$	12,298		$	11,206
Work in progress		743			534
Finished goods		28,887			28,698
Total inventory		$	41,928		$	40,438

 

9

Table of Contents

 

(4)                     Intangible Assets

 

At March 31, 2015, and December 31, 2014, intangibles for product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $1,096 and $1,059, and a net amount of $667 and $704, 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, 2015, and 2014, was $37 and $37, respectively.

 

(5)                     Investments

 

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

 

As of March 31, 2015		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Municipal obligations		$	100		$	—		$	—		$	100
U.S. government securities funds		1,791			—			(8		)	1,783
Equity securities		227			472			(13		)	686
Total short-term investment securities		$	2,118		$	472		$	(21	)	$	2,569

 

As of December 31, 2014		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Municipal obligations		$	100		$	1		$	—		$	101
U.S. government securities funds		1,791			—			(15		)	1,776
Equity securities		227			454			(12		)	669
Total short-term investment securities		$	2,118		$	455		$	(27	)	$	2,546

 

The municipal obligations held at a fair value of $100 at March 31, 2015, all mature in less than one year.

 

During the three-month periods ended March 31, 2015, and 2014, the proceeds from the sales of available-for-sale securities were $0 and $33, respectively.

 

The Company’s trading securities portfolio totaled $1,118 at March 31, 2015, and $1,038 at December 31, 2014, and generated gains of $23 and $15 for the three months ended March 31, 2015, and 2014.

 

As of March 31, 2015, and December 31, 2014, the Company had unrealized losses of $8 and $15, 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.

 

(6)                     Long-Term Debt and Revolving Credit Facility

 

The Company’s revolving credit agreement with Wells Fargo Bank, N.A., permits the Company to borrow up to $25,000 through September 1, 2016, bearing interest at LIBOR plus 1.25 percent (1.50 percent as of March 31, 2015, and December 31, 2014). The Company must pay an annual commitment fee of 0.25 percent on the unused portion of the commitment. Currently, the revolving credit agreement matures on September 1, 2016.  At March 31, 2015, and December 31, 2014, the outstanding balance under the revolving credit agreement was $348 and $0, respectively.

 

The revolving credit agreement contains restrictions on liquidity, leverage, minimum net income and consecutive quarterly net losses. In addition, the agreement restricts 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 remains in compliance with these debt covenants as of March 31, 2015.

 

(7)                     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.

 

10

Table of Contents

 

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, 2015 and 2014:

 

		Three Months Ended March 31,
		2015			2014
Net income:
Net income from continued operations		$	4,203		$	10,236
Income (loss) from discontinued operations		$	1,312		$	(571	)
Net income attributable to common shareholders		$	5,667		$	9,665
Basic weighted average shares outstanding		18,621			16,179
Basic net income per common share:
Net income from continued operations		$	0.23		$	0.63
Income (loss) from discontinued operations		$	0.07		$	(0.03	)
Net income attributable to common shareholders		$	0.30		$	0.60
Diluted shares outstanding
Basic weighted average shares outstanding		18,621			16,179
Stock options		571			439
Diluted weighted average shares outstanding		19,192			16,618
Diluted net income per common share:
Net income from continued operations		$	0.22		$	0.61
Income (loss) from discontinued operations		$	0.07		$	(0.03	)
Net income attributable to common shareholders		$	0.30		$	0.58
Potentially dilutive shares excluded from diluted per share amounts:
Stock options		399			134
Potentially anti-dilutive shares excluded from diluted per share amounts:
Stock options		733			210

 

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.

 

(8)                    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 February 25, 2015, the Company announced a cash dividend of $0.10 per common share in an aggregate amount of $1,865 that was paid on March 23, 2015, to shareholders of record on March 12, 2015.

 

Share Repurchase Program

 

In December 2014, the Company completed share repurchases under its previously announced $10 million share repurchase program. In November 2014, the Board of Directors authorized a $20 million share repurchase program beginning January 1, 2015. 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

 

11

Table of Contents

 

and the program may be discontinued or suspended at any time. At March 31, 2015, the remaining balance available for repurchases under the program was $17,143.

 

The following is a summary of the Company’s repurchases of common shares during the three months ended March 31, 2015:

 

Period		Number of Shares		Average Price Paid per Share			Program Balance Used for Repurchases
January 1 — March 31, 2015		202		$	14.08		$	2,857

 

To enhance the Company’s ability to repurchase share, the Company established a trading plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”). A plan under Rule 10b5-1 allows the Company to repurchase its shares at times when it otherwise might be prevented from doing so in compliance with insider trading laws or because of a self-imposed trading blackout period. Repurchases are subject to Securities and Exchange Commission (“SEC”) regulations as well as certain price, market volume and timing constraints specified in the trading plan.

 

Share-Based Compensation

 

During the year ended December 31, 2012, the Company’s shareholders adopted and approved the Nature’s Sunshine Products, Inc. 2012 Stock Incentive Plan (the “2012 Incentive Plan”).  The 2012 Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and other stock-based awards.  The Compensation Committee of the Board of Directors has authority and discretion to determine the type of award as well as the amount, terms and conditions of each award under the 2012 Incentive Plan, subject to the limitations of the 2012 Incentive Plan. A total of 1,500 shares of the Company’s common stock were originally authorized for the granting of awards under the 2012 Incentive Plan. During the period ended March 31, 2015, the Company’s shareholders approved an amendment to the 2012 Incentive Plan, to increase the number of shares of Common Stock reserved for issuance by 1,500 shares. The number of shares available for awards, as well as the terms of outstanding awards, are subject to adjustment as provided in the 2012 Incentive Plan for stock splits, stock dividends, recapitalizations and other similar events.

 

The Company also maintains a stock incentive plan, which was approved by shareholders in 2009 (the “2009 Incentive Plan”). The 2009 Incentive Plan also provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and other stock-based awards.  Under the 2012 Incentive Plan, any shares subject to award, or awards forfeited or reacquired by the Company issued under the 2009 Incentive Plan are available for award up to a maximum of 400 shares.

 

Stock Options

 

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.

 

Stock option activity for the period ended March 31, 2015, is as follows:

 

		Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2014		2,037		$	11.69
Granted		310		14.27
Forfeited or cancelled		(49	)	15.75
Exercised		(227	)	7.63
Options outstanding at March 31, 2015		2,071		12.43

 

During the three-month period ended March 31, 2015, the Company issued time-based stock options to purchase 310 shares of common stock under the 2012 Stock Incentive Plan to the Company’s Board of Directors and executive officers. These options were issued with a weighted-average exercise price of $14.27 per share and a weighted-average grant date fair value of $4.92 per share. All of the options issued have an option termination date of ten years from the option grant date.

 

12

Table of Contents

 

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, 2015:

 

		2015
Expected life (in years)		5.0 to 6.0
Risk-free interest rate		1.5
Expected volatility		46.3 to 52.3
Dividend yield		2.8

 

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, and September 19, 2014, the Company paid special non-recurring cash dividends of $1.50 per common share. The Company has excluded these special non-recurring cash dividends 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, 2015, and 2014, was approximately $580 and $897, respectively; the related tax benefit was approximately $229 and $354, respectively. As of March 31, 2015, and December 31, 2014, the unrecognized share-based compensation expense related to the grants described above was $2,589 and $2,018, respectively. As of March 31, 2015, the remaining compensation cost is expected to be recognized over the weighted-average period of approximately 1.9 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 periods ended March 31, 2015 and 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.

 

At March 31, 2015, the aggregate intrinsic value of outstanding stock options to purchase 2,071 shares of common stock, exercisable stock options to purchase 1,119 shares of common stock and stock options to purchase 780 shares of common stock that are expected to vest was $2,638, $2,167 and $448, respectively. At December 31, 2014, the aggregate intrinsic value of outstanding options to purchase 2,037 shares of common stock, the exercisable options to purchase 1,069 shares of common stock, and options to purchase 794 shares of common stock expected to vest was $6,801, $4,928 and $1,779, respectively.

 

Restricted Stock Units

 

The Company’s outstanding restricted stock units (RSUs) include time-based RSUs, which vest over differing periods ranging from 12 months up to 48 months from the RSU grant date; performance-based RSUs, which vest upon achieving both cumulative annual net sales growth targets over a rolling one-year period and RSUs which vest upon achieving operating income and earnings per share targets over a rolling one-year period. RSUs given to the Board of Directors contain a restriction period in which the shares are not issued until two years after vesting. At March 31, 2015, and December 31, 2014, there were 32 and 32 vested RSUs given to the Board of Directors that had a restriction period.

 

Restricted stock unit activity for the period ended March 31, 2015 is as follows:

 

		Number of Shares		Weighted Average Grant Date Fair Value
Units outstanding at December 31, 2014		180		$	15.09
Granted		569		12.85
Issued		(30	)	13.63
Forfeited or cancelled		(5	)	12.93
Units outstanding at March 31, 2015		714		12.69

 

During the three-month period ended March 31, 2015, the Company granted 569 restricted stock units (RSUs) of common stock under the 2012 Incentive Plan to the Company’s executive officers and other employees, which are composed of both time-based RSUs and net sales and operating income and earnings per share performance-based RSUs. The time-based RSUs were issued with a weighted-average grant date fair value of $13.49 per share and vest in annual installments over a three year period from the grant date. The net sales and operating income and earnings per share performance-based RSUs were issued with a weighted-average grant date fair value of $12.13 per share and vest in annual installments over a three year period from the grant date.

 

RSUs are valued at the market value on the date of grant, which is the grant date share price discounted for expected dividend payments during the vesting period.  For RSUs with post-vesting restrictions, a Finnerty Model was utilized to calculate a valuation

 

13

Table of Contents

 

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 three-month periods ended March 31, 2015, and 2014, was approximately $756 and $197, respectively; the related tax benefit was approximately $299 and $78, respectively. As of March 31, 2015, and December 31, 2014, the unrecognized share-based compensation expense related to the grants described above was $3,942 and $849, respectively. As of March 31, 2015, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 2.2 years.

 

The Company has not recognized any share-based compensation expense related to the net sales revenue and EPS performance-based RSUs for the three-month periods ended March 31, 2015 and 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 $3,600 of potential share-based compensation expense.

 

The number of shares issued upon vesting or exercise for restricted stock units granted, pursuant to our share-based compensation plans, is net of the minimum statutory withholding requirements that the Company pays on behalf of its employees, which was eight shares for the three-month period ended March 31, 2015. Although shares withheld are not issued, they are treated as common share repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the repurchase program described above.

 

Stock Appreciation Rights

 

The Company’s outstanding stock appreciation rights (SARs) are time-based SARs, which vest over differing periods ranging from 12 months up to 48 months from the SAR grant date. The SARs have a strike price equal to the fair market value of one share of common stock on the grant date. Subsequent to vesting, the employee has the option to exercise the SAR and will receive the intrinsic value of the SAR as income on the exercise date. SARs do not entitle a participant to receive or purchase shares and are settled in cash. SARs will not reduce the number of shares of common stock available for issuance under the Company’s Stock Incentive Plans.

 

Stock appreciation right activity for the period ended March 31, 2015 is as follows:

 

		Number of Shares		Weighted Average Grant Date Fair Value
Units outstanding at December 31, 2014		30		$	5.47
Granted		—		—
Forfeited or cancelled		(10	)	5.86
Exercised		—		—
Units outstanding at March 31, 2015		20		5.27

 

Expected SAR 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, and September 19, 2014, the Company paid special non-recurring cash dividends of $1.50 per common share. The Company has excluded these special non-recurring cash dividends from the dividend yield used in the Black-Scholes SAR-pricing model calculations as it is not representative of future dividends to be declared by the Company.

 

Share-based compensation expense from SARs for the three-month period ended March 31, 2015, was approximately $3; and the related tax benefit was approximately $1. As of March 31, 2015, and December 31, 2014, the unrecognized share-based compensation expense related to the grants described above was $71 and $150, respectively. As of March 31, 2015, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 2.2 years.

 

14

Table of Contents

 

(9)                     Segment Information

 

The Company has four 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 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 NSP Americas and NSP Russia, Central and Eastern Europe to warrant accounting for these operations as a separate business segment. The Company’s fourth business segment, China and New Markets is deploying a multi-brand, multi-channel go-to-market strategy that offers select Nature’s Sunshine branded products through retail locations across China as well as ecommerce, and select Synergy branded products through a direct selling model.  The time to market will be dependent upon regulatory processes including product registration and permit approvals. The China and New Markets segment also includes the Company’s export sales business, in which the Company sells its products to various locally managed entities independent of the Company that have distribution rights for the relevant market. All of the net sales revenue to date in the China and New Markets segment is through the Company’s export business to foreign markets outside of China set forth above that were previously part of NSP Americas. 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.

 

In the fourth quarter of 2014, the Company created the China and New Markets segment. The Company moved the reporting of its export business, in which the Company sells our products to a locally managed entity independent of the Company that has distribution rights for the market, from the NSP Americas segment to the China and New Markets segment during the year ended December 31, 2014, as well as the results of its NSP Peru & United Kingdom markets, which were converted to export markets during the prior year.

 

Reportable business segment information is as follows:

 

		Three Months Ended March 31,
		2015			2014
Net sales revenue:
NSP Americas		$	46,510		$	46,366
NSP Russia, Central and Eastern Europe		7,443			15,037
Synergy WorldWide		28,768			30,043
China and New Markets		1,157			2,021
Total net sales revenue		83,878			93,467
Contribution margin (1):
NSP Americas		19,520			19,071
NSP Russia, Central and Eastern Europe		2,596			5,396
Synergy WorldWide		9,048			10,653
China and New Markets		496			873
Total contribution margin		31,660			35,993
Selling, general and administrative		26,330			29,152
Operating income		5,330			6,841
Other income (expense), net		(318		)	(262		)
Income from continuing operations before provision for income taxes		$	5,012		$	6,579

 

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

 

15

Table of Contents

 

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, 2015 and 2014, as follows:

 

		Three Months Ended March 31,
		2015			2014
Net sales revenue:
United States		$	38,522		$	37,615
South Korea		12,080			12,371
Other		33,276			43,481
		$	83,878		$	93,467

 

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

 

		Three Months Ended March 31,
		2015			2014
NSP Americas:
General health		$	20,032		$	19,366
Immune		6,217			5,959
Cardiovascular		3,101			3,354
Digestive		13,365			13,693
Personal care		970			1,021
Weight management		2,825			2,973
		46,510			46,366
NSP Russia, Eastern and Central Europe:
General health		$	2,879		$	5,545
Immune		913			1,968
Cardiovascular		453			938
Digestive		1,970			3,947
Personal care		882			1,868
Weight management		346			771
		7,443			15,037
Synergy WorldWide:
General health		$	10,137		$	10,753
Immune		233			211
Cardiovascular		8,881			10,444
Digestive		4,594			5,017
Personal care		1,612			1,736
Weight management		3,311			1,882
		28,768			30,043
China and New Markets:
General health		$	531		$	800
Immune		158			282
Cardiovascular		81			136
Digestive		290			550
Personal care		27			31
Weight management		70			222
		1,157			2,021
		$	83,878		$	93,467

 

16

Table of Contents

 

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

 

		March 31, 2015			December 31, 2014
Property, plant and equipment:
United States		$	53,856		$	48,013
Other		3,083			3,330
Total property, plant and equipment		$	56,939		$	51,343

 

(10)              Income Taxes

 

For the three months ended March 31, 2015 and 2014, the Company’s provision (benefit) for income taxes, as a percentage of income before income taxes was 16.1 percent and (55.6) 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, 2015, was primarily attributed to the partial utilization of foreign tax credit benefits related to intercompany dividends paid by foreign subsidiaries to the U.S corporation in prior years.

 

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.

 

Changes to the effective rate due to dividends received from foreign subsidiaries and the impact of foreign tax credits are expected to be recurring. 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 2013 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2007 through 2014.

 

As of March 31, 2015, the Company had accrued $6,776 related to unrecognized tax positions compared with $6,598 as of December 31, 2014.  This net increase was primarily attributed to increases in transfer pricing contingencies.

 

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. Although the Company believes its tax 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.

 

(11)              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 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 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

 

17