UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
NATURES SUNSHINE PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
Utah |
|
87-0327982 |
(State or other jurisdiction of |
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(IRS Employer |
incorporation or organization) |
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Identification No.) |
2500 West Executive Parkway, Suite 100
Lehi, Utah 84043
(Address of principal executive offices and zip code)
(801) 341-7900
(Registrants telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x.
The number of shares of Common Stock, no par value, outstanding on October 30, 2015, was 18,588,176 shares.
NATURES SUNSHINE PRODUCTS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2015
4 | ||
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4 | ||
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4 | |
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5 | |
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5 | |
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Condensed Consolidated Statement of Changes in Stockholders Equity |
7 |
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8 | |
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9 | |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
21 | |
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37 | ||
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40 | ||
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41 | ||
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41 | ||
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41 | ||
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42 | ||
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42 | ||
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42 | ||
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42 | ||
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43 |
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 the Companys objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that the Company intends, expects, projects, believes or anticipates 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 Managements 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, and in its Annual Report on Form 10-K for the year ended December 31, 2014, but include the following:
· any negative consequences resulting from the economy, including the availability of liquidity to the Company, its independent Distributors and its suppliers or the willingness of its customers to purchase products;
· its relationship with, and its inability to influence the actions of, its independent Distributors, and other third parties with whom it does business;
· improper activity by its employees or independent Distributors;
· negative publicity related to its products, ingredients, or direct selling organization or the nutritional supplement industry;
· changing consumer preferences and demands;
· its reliance upon, or the loss or departure of any member of, its senior management team which could negatively impact its Distributor relations and operating results;
· increased state and federal regulatory scrutiny of the nutritional supplement industry, including, but not limited to targeting of ingredients, testing methodology and product claims;
· the competitive nature of its business and the nutritional supplement industry;
· regulatory matters governing its products, ingredients, the nutritional supplement industry, its direct selling program, or the direct selling market in which it operates;
· legal challenges to its direct selling program or to the classification of its independent Distributors;
· risks associated with operating internationally and the effect of economic factors, including foreign exchange, inflation, disruptions or conflicts with its 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;
· its dependence on increased penetration of existing markets;
· its reliance on its 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 its independent Distributors;
· product liability claims;
· share price volatility related to, among other things, speculative trading; and
· the full implementation of its 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, the Company 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, it refers to Natures Sunshine Products, Inc., together with its subsidiaries, as we, us, our Company or the Company.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
|
|
September 30, |
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December 31, |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
43,882 |
|
$ |
58,699 |
|
Accounts receivable, net of allowance for doubtful accounts of $776 and $849, respectively |
|
7,319 |
|
6,732 |
| ||
Investments available for sale |
|
1,786 |
|
2,546 |
| ||
Inventories |
|
39,380 |
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40,438 |
| ||
Deferred income tax assets |
|
5,068 |
|
4,950 |
| ||
Prepaid expenses and other |
|
7,324 |
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7,884 |
| ||
Total current assets |
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104,759 |
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121,249 |
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|
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Property, plant and equipment, net |
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65,083 |
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51,343 |
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Investment securities - trading |
|
992 |
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1,038 |
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Intangible assets, net |
|
581 |
|
704 |
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Deferred income tax assets |
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14,807 |
|
14,495 |
| ||
Other assets |
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10,461 |
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7,970 |
| ||
|
|
$ |
196,683 |
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$ |
196,799 |
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|
|
|
|
|
| ||
Liabilities and Shareholders Equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
5,673 |
|
$ |
5,237 |
|
Accrued volume incentives |
|
16,126 |
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16,867 |
| ||
Accrued liabilities |
|
24,306 |
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28,957 |
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Deferred revenue |
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3,632 |
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4,717 |
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Income taxes payable |
|
791 |
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2,131 |
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Revolving credit facility payable |
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1,199 |
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Total current liabilities |
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51,727 |
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57,909 |
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|
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Liability related to unrecognized tax benefits |
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6,978 |
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6,598 |
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Deferred compensation payable |
|
992 |
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1,038 |
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Other liabilities |
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2,439 |
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2,297 |
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Total liabilities |
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62,136 |
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67,842 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock, no par value, 50,000 shares authorized, 18,625 and 18,662 shares issued and outstanding as of September 30, 2015, and December 31, 2014, respectively |
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126,155 |
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125,489 |
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Retained earnings |
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16,265 |
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10,891 |
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Noncontrolling interests |
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3,108 |
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3,781 |
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Accumulated other comprehensive loss |
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(10,981 |
) |
(11,204 |
) | ||
Total shareholders equity |
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134,547 |
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128,957 |
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$ |
196,683 |
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$ |
196,799 |
|
See accompanying notes to condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share information)
(Unaudited)
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Three Months Ended |
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2015 |
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2014 |
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|
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Net sales revenue |
|
$ |
79,586 |
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$ |
93,406 |
|
Cost of sales |
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(20,643 |
) |
(22,742 |
) | ||
Gross profit |
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58,943 |
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70,664 |
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Operating expenses: |
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Volume incentives |
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28,690 |
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34,918 |
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Selling, general and administrative |
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27,115 |
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30,200 |
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Operating income |
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3,138 |
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5,546 |
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Other income (loss), net |
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(247 |
) |
(42 |
) | ||
Income from continuing operations before provision for income taxes |
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2,891 |
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5,504 |
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Provision for income taxes |
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1,284 |
|
407 |
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Net income from continuing operations |
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1,607 |
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5,097 |
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Income (loss) from discontinued operations |
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804 |
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(4,106 |
) | ||
Net income |
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2,411 |
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991 |
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Net loss attributable to non-controlling interests |
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(355 |
) |
(26 |
) | ||
Net income attributable to common shareholders |
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$ |
2,766 |
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$ |
1,017 |
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Basic and diluted net income per common share |
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Basic: |
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Net income from continuing operations |
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$ |
0.09 |
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$ |
0.29 |
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Income (loss) from discontinued operations |
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$ |
0.04 |
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$ |
(0.24 |
) |
Net income attributable to common shareholders |
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$ |
0.15 |
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$ |
0.06 |
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Diluted: |
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Net income from continuing operations |
|
$ |
0.08 |
|
$ |
0.29 |
|
Income (loss) from discontinued operations |
|
$ |
0.04 |
|
$ |
(0.23 |
) |
Net income attributable to common shareholders |
|
$ |
0.15 |
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$ |
0.06 |
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|
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|
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Weighted average basic common shares outstanding |
|
18,688 |
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17,310 |
| ||
Weighted average diluted common shares outstanding |
|
19,117 |
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17,812 |
| ||
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|
|
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|
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Dividends declared per common share |
|
$ |
0.10 |
|
$ |
1.60 |
|
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
|
|
Three Months Ended |
| ||||
|
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2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Net income |
|
$ |
2,411 |
|
$ |
991 |
|
Foreign currency translation gain (loss) (net of tax) |
|
631 |
|
(1,124 |
) | ||
Net unrealized gains (loss) on investment securities (net of tax) |
|
3 |
|
(3 |
) | ||
Total comprehensive income (loss) |
|
$ |
3,045 |
|
$ |
(136 |
) |
See accompanying notes to condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share information)
(Unaudited)
|
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Nine Months Ended |
| ||||
|
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2015 |
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2014 |
| ||
|
|
|
|
|
| ||
Net sales revenue |
|
$ |
244,711 |
|
$ |
279,704 |
|
Cost of sales |
|
(63,592 |
) |
(68,116 |
) | ||
Gross profit |
|
181,119 |
|
211,588 |
| ||
|
|
|
|
|
| ||
Operating expenses: |
|
|
|
|
| ||
Volume incentives |
|
88,630 |
|
104,081 |
| ||
Selling, general and administrative |
|
80,837 |
|
89,293 |
| ||
Operating income |
|
11,652 |
|
18,214 |
| ||
Other income (loss), net |
|
(567 |
) |
(383 |
) | ||
Income from continuing operations before provision for income taxes |
|
11,085 |
|
17,831 |
| ||
Provision (benefit) for income taxes |
|
2,880 |
|
(1,052 |
) | ||
Net income from continuing operations |
|
8,205 |
|
18,883 |
| ||
Income (loss) from discontinued operations |
|
2,116 |
|
(4,993 |
) | ||
Net income |
|
10,321 |
|
13,890 |
| ||
Net loss attributable to non-controlling interests |
|
(673 |
) |
(26 |
) | ||
Net income attributable to common shareholders |
|
$ |
10,994 |
|
$ |
13,916 |
|
|
|
|
|
|
| ||
Basic and diluted net income per common share |
|
|
|
|
| ||
Basic: |
|
|
|
|
| ||
Net income from continuing operations |
|
$ |
0.44 |
|
$ |
1.14 |
|
Income (loss) from discontinued operations |
|
$ |
0.11 |
|
$ |
(0.30 |
) |
Net income attributable to common shareholders |
|
$ |
0.59 |
|
$ |
0.84 |
|
|
|
|
|
|
| ||
Diluted: |
|
|
|
|
| ||
Net income from continuing operations |
|
$ |
0.43 |
|
$ |
1.11 |
|
Income (loss) from discontinued operations |
|
$ |
0.11 |
|
$ |
(0.29 |
) |
Net income attributable to common shareholders |
|
$ |
0.57 |
|
$ |
0.82 |
|
|
|
|
|
|
| ||
Weighted average basic common shares outstanding |
|
18,678 |
|
16,563 |
| ||
Weighted average diluted common shares outstanding |
|
19,193 |
|
17,068 |
| ||
|
|
|
|
|
| ||
Dividends declared per common share |
|
$ |
0.30 |
|
$ |
1.80 |
|
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
|
|
Nine Months Ended |
| ||||
|
|
2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Net income |
|
$ |
10,321 |
|
$ |
13,890 |
|
Foreign currency translation gain (loss) (net of tax) |
|
485 |
|
(153 |
) | ||
Reclassification of net realized gains on marketable securities in net income (net of tax) |
|
(294 |
) |
|
| ||
Net unrealized gains on investment securities (net of tax) |
|
32 |
|
8 |
| ||
Total comprehensive income |
|
$ |
10,544 |
|
$ |
13,745 |
|
See accompanying notes to condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(Amounts in thousands)
(Unaudited)
|
|
Common Stock |
|
Retained |
|
Non- |
|
Accumulated |
|
|
| |||||||
|
|
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 |
|
|
|
3,276 |
|
|
|
|
|
|
|
3,276 |
| |||||
Proceeds from the exercise of stock options, and issuance of restricted stock units |
|
421 |
|
3,804 |
|
|
|
|
|
|
|
3,804 |
| |||||
Tax benefit deficiency from share-based compensation |
|
|
|
(288 |
) |
|
|
|
|
|
|
(288 |
) | |||||
Repurchase of common stock |
|
(458 |
) |
(6,126 |
) |
|
|
|
|
|
|
(6,126 |
) | |||||
Cash dividends (0.30 per share) |
|
|
|
|
|
(5,620 |
) |
|
|
|
|
(5,620 |
) | |||||
Net income (loss) |
|
|
|
|
|
10,994 |
|
(673 |
) |
|
|
10,321 |
| |||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
223 |
|
223 |
| |||||
Balance at September 30, 2015 |
|
18,625 |
|
$ |
126,155 |
|
$ |
16,265 |
|
$ |
3,108 |
|
$ |
(10,981 |
) |
$ |
134,547 |
|
See accompanying notes to condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
|
|
Nine Months Ended |
| ||||
|
|
2015 |
|
2014 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net income |
|
$ |
10,321 |
|
$ |
13,890 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Provision for doubtful accounts |
|
21 |
|
130 |
| ||
Impairment of Venezuela property, plant and equipment, net |
|
|
|
2,947 |
| ||
Depreciation and amortization |
|
3,325 |
|
3,510 |
| ||
Share-based compensation expense |
|
3,276 |
|
3,034 |
| ||
(Gain) loss on sale of property and equipment |
|
(982 |
) |
36 |
| ||
Deferred income taxes |
|
(137 |
) |
(3,961 |
) | ||
Amortization of bond discount |
|
|
|
3 |
| ||
Purchase of trading investment securities |
|
(205 |
) |
(133 |
) | ||
Proceeds from sale of trading investment securities |
|
212 |
|
125 |
| ||
Realized gains on investments |
|
(435 |
) |
(33 |
) | ||
Foreign exchange losses |
|
2,021 |
|
2,724 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
|
(708 |
) |
827 |
| ||
Inventories |
|
56 |
|
181 |
| ||
Prepaid expenses and other current assets |
|
373 |
|
455 |
| ||
Other assets |
|
(3,184 |
) |
(1,478 |
) | ||
Accounts payable |
|
1,051 |
|
(598 |
) | ||
Accrued volume incentives |
|
(228 |
) |
235 |
| ||
Accrued liabilities |
|
(3,975 |
) |
(3,989 |
) | ||
Deferred revenue |
|
(1,085 |
) |
(52 |
) | ||
Income taxes payable |
|
(1,718 |
) |
(803 |
) | ||
Liability related to unrecognized tax benefits |
|
225 |
|
(3,550 |
) | ||
Deferred compensation payable |
|
(46 |
) |
41 |
| ||
Net cash provided by operating activities |
|
8,178 |
|
13,541 |
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
Purchases of property, plant and equipment |
|
(17,532 |
) |
(19,973 |
) | ||
Proceeds from sale of property, plant and equipment |
|
1,374 |
|
7 |
| ||
Purchase of investments available for sale |
|
|
|
(18 |
) | ||
Proceeds from the sale of investments available for sale |
|
810 |
|
247 |
| ||
Net cash used in investing activities |
|
(15,348 |
) |
(19,737 |
) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
Payments of cash dividends |
|
(5,620 |
) |
(33,357 |
) | ||
Principal payments of long-term debt and revolving credit facility |
|
|
|
(12,267 |
) | ||
Borrowings of long-term debt and revolving credit facility |
|
1,199 |
|
|
| ||
Repurchase of common stock |
|
(6,126 |
) |
(2,731 |
) | ||
Net proceeds from the issuance of shares to noncontrolling interest |
|
|
|
46,216 |
| ||
Investment by noncontrolling interest |
|
|
|
4,000 |
| ||
Proceeds from the exercise of stock options |
|
3,804 |
|
437 |
| ||
Net cash (used in) provided by financing activities |
|
(6,743 |
) |
2,298 |
| ||
Effect of exchange rates on cash and cash equivalents |
|
(904 |
) |
(2,893 |
) | ||
Net decrease in cash and cash equivalents |
|
(14,817 |
) |
(6,791 |
) | ||
Cash and cash equivalents at the beginning of the period |
|
58,699 |
|
77,247 |
| ||
Cash and cash equivalents at the end of the period |
|
$ |
43,882 |
|
$ |
70,456 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
| ||
Cash paid for income taxes |
|
$ |
8,669 |
|
$ |
5,996 |
|
Cash paid for interest |
|
98 |
|
155 |
|
See accompanying notes to condensed consolidated financial statements.
NATURES SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share information)
(Unaudited)
(1) Basis of Presentation
Natures Sunshine Products, Inc., together with its subsidiaries (hereinafter referred to collectively as the Company), is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. The Company is a Utah corporation with its principal place of business in Lehi, Utah, and sells its products to a sales force of independent Managers and Distributors who use the products themselves or resell them to other independent Distributors or consumers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of the Companys major product groups are subject to regulation by one or more governmental agencies.
The Company markets its products in Australia, Austria, Belarus, Canada, Colombia, Costa Rica, the Czech Republic, Denmark, the Dominican Republic, Ecuador, El Salvador, Finland, Germany, Guatemala, Honduras, Hong Kong, Iceland, Indonesia, Ireland, 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, and the United States. The Company also markets its products through a wholesale model to Argentina, Australia, Chile, Israel, New Zealand, Norway, Peru and the United Kingdom. The Company discontinued operations in Vietnam (during the second quarter of 2015), which were approximately 0.1 percent and 0.4 percent of consolidated net sales during the nine-month periods ended September 30, 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 Companys financial information as of September 30, 2015, and for the three- and nine-month periods ended September 30, 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 Companys 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 Companys functional currency for this market. As a result, there were no resulting gains or losses from a re-measurement of the financial statements using official rates of the Companys Belarusian subsidiary. However, as a result of the weakening of the Belarusian ruble, the purchasing power of the Companys independent Distributors in this market has diminished. During the three months ended September 30, 2015 and 2014, the Companys Belarusian subsidiarys net sales revenue represented approximately 1.5 percent and 2.2 percent of consolidated net sales revenue, respectively. During the nine months ended September 30, 2015 and 2014, the Companys Belarusian subsidiarys net sales revenue represented approximately 1.7 percent and 2.4 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. In July 2015, the FASB approved a proposal that extended the required implementation date one year to the interim and annual periods beginning after December 15, 2017, but would also permit companies to adopt the standard at the original effective date, which was the interim and annual periods beginning after December 15, 2016. The
adoption of this ASU is not expected to have a material impact on the Companys 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 managements responsibility to evaluate whether there is substantial doubt about an entitys 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 ASU is not expected to have a material impact on the Companys results of operations, consolidated 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 Companys results of operations, consolidated financial statements and footnote disclosures.
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 the Companys results of operations, consolidated financial statements and footnote disclosures.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update specifies that inventory should be subsequently measured at the lower of cost or net realizable value, which is the ordinary selling price less any completion, transportation and disposal costs. However, the ASU does not apply to inventory measured using the last-in-first-out or retail methods. This update is effective for interim and annual periods beginning after December 15, 2016. Adoption of the ASU is prospective. The adoption of this ASU is not expected to have a material impact on the Companys results of operations, 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 Companys 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 Companys discontinued operations for the nine months ended:
|
|
September 30, |
|
September 30, |
| ||
|
|
2015 |
|
2014 |
| ||
Net sales revenue |
|
$ |
|
|
$ |
5,250 |
|
|
|
|
|
|
| ||
Income (loss) before income tax provision |
|
$ |
2,604 |
|
$ |
(4,989 |
) |
Income tax provision |
|
488 |
|
4 |
| ||
Income (loss) from discontinued operations |
|
$ |
2,116 |
|
$ |
(4,993 |
) |
During the nine months ended September 30, 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. During the nine months ended September 30, 2015, the Company released $804 in accrued liabilities, net of tax, related to prior sales and use taxes as well as other litigation in Brazil, which is included in the results from discontinued operations. The Company ceased its operations in Brazil in 2010.
The income (loss) from discontinued operations did not have a material impact on the Companys operating cash flows during the nine months ended September 30, 2015.
(3) Restructuring Related Expenses
In April 2015, the Company announced its plan to streamline its operations and refocus its activities on profitable growth opportunities. The planned streamlining is expected to reduce costs, improve efficiencies and renew focus on larger and more profitable Company markets. As part of the plan, the Company eliminated approximately 100 positions worldwide through both severance and attrition and ceased operations in Vietnam. The Company incurred approximately $300 of non-recurring expenses during the three months ended September 30, 2015 and approximately $2,400 of non-recurring expenses during the nine months ended September 30, 2015, which are recorded primarily in selling, general and administrative expenses, of which $2,060 was related to severance and termination benefits and $340 was related to other exit costs. All but $710 of the costs incurred during the nine months ended September 30, 2015 have been paid.
(4) Inventories
The composition of inventories is as follows:
|
|
September 30, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
Raw materials |
|
$ |
11,925 |
|
$ |
11,206 |
|
Work in progress |
|
946 |
|
534 |
| ||
Finished goods |
|
26,509 |
|
28,698 |
| ||
Total inventory |
|
$ |
39,380 |
|
$ |
40,438 |
|
(5) Intangible Assets
At September 30, 2015, and December 31, 2014, intangibles for product formulations had a gross carrying amount of $1,363 and $1,763, accumulated amortization of $782 and $1,059, and a net amount of $581 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 September 30, 2015 and 2014, was $49 and $37, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2015, and 2014, was $123 and $111, respectively.
(6) Investments
The amortized cost and estimated fair values of available-for-sale securities by balance sheet classification are as follows:
As of September 30, 2015 |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
| ||||
U.S. government securities funds |
|
$ |
1,791 |
|
$ |
|
|
$ |
(5 |
) |
$ |
1,786 |
|
Total short-term investment securities |
|
$ |
1,791 |
|
$ |
|
|
$ |
(5 |
) |
$ |
1,786 |
|
As of December 31, 2014 |
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
| ||||
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 |
|
During the nine-month period ended September 30, 2015, and 2014, the proceeds from the sales of available-for-sale securities were $810 and $51, respectively. During the nine-month period ended September 30, 2015, the Company had gross realized gains of $294 on sales of available-for-sale securities (net of tax). There were no gross realized gains (losses) on sales of available-for-sale securities (net of tax) for the nine-month period ended September 30, 2014.
The Companys trading securities portfolio totaled $992 at September 30, 2015, and $1,038 at December 31, 2014, and generated losses of $37 and gains of $44 for the nine months ended September 30, 2015, and 2014.
As of September 30, 2015, and December 31, 2014, the Company had unrealized losses of $5 and $15, respectively, in its U.S. government securities funds.
(7) Long-Term Debt and Revolving Credit Facility
The Companys revolving credit agreement with Wells Fargo Bank, N.A., permits the Company to borrow up to $25,000 through September 1, 2017, bearing interest at LIBOR plus 1.25 percent (1.50 percent as of September 30, 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, 2017. At September 30, 2015 and December 31, 2014, the Company had an outstanding balance under the revolving credit agreement of $1,199 and $0, respectively.
The revolving credit agreement contains restrictions on 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 is in compliance with these debt covenants as of September 30, 2015.
(8) 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 and nine months ended September 30, 2015 and 2014:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
Net income: |
|
|
|
|
|
|
|
|
| ||||
Net income from continued operations |
|
$ |
1,607 |
|
$ |
5,097 |
|
$ |
8,205 |
|
$ |
18,883 |
|
Income (loss) from discontinued operations |
|
$ |
804 |
|
$ |
(4,106 |
) |
$ |
2,116 |
|
$ |
(4,993 |
) |
Net income attributable to common shareholders |
|
$ |
2,766 |
|
$ |
1,017 |
|
$ |
10,994 |
|
$ |
13,916 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
|
18,688 |
|
17,310 |
|
18,678 |
|
16,563 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic net income per common share: |
|
|
|
|
|
|
|
|
| ||||
Net income from continued operations |
|
$ |
0.09 |
|
$ |
0.29 |
|
$ |
0.44 |
|
$ |
1.14 |
|
Income (loss) from discontinued operations |
|
$ |
0.04 |
|
$ |
(0.24 |
) |
$ |
0.11 |
|
$ |
(0.30 |
) |
Net income attributable to common shareholders |
|
$ |
0.15 |
|
$ |
0.06 |
|
$ |
0.59 |
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
|
18,688 |
|
17,310 |
|
18,678 |
|
16,563 |
| ||||
Stock options and restricted stock units |
|
429 |
|
502 |
|
515 |
|
505 |
| ||||
Diluted weighted average shares outstanding |
|
19,117 |
|
17,812 |
|
19,193 |
|
17,068 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Diluted net income per common share: |
|
|
|
|
|
|
|
|
| ||||
Net income from continued operations |
|
$ |
0.08 |
|
$ |
0.29 |
|
$ |
0.43 |
|
$ |
1.11 |
|
Income (loss) from discontinued operations |
|
$ |
0.04 |
|
$ |
(0.23 |
) |
$ |
0.11 |
|
$ |
(0.29 |
) |
Net income attributable to common shareholders |
|
$ |
0.15 |
|
$ |
0.06 |
|
$ |
0.57 |
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
| ||||
Potentially dilutive shares excluded from diluted per share amounts |
|
348 |
|
133 |
|
348 |
|
133 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Potentially anti-dilutive shares excluded from diluted per share amounts |
|
752 |
|
210 |
|
613 |
|
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 periods presented.
(9) Capital Transactions
Dividends
The declaration of future dividends is subject to the discretion of the Companys Board of Directors and will depend upon various factors, including the Companys earnings, financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by its Board of Directors.
On 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. On May 7, 2015, the Company announced a cash dividend of $0.10 per common share in an aggregate amount of $1,875 that was paid on June 2, 2015, to shareholders of record on May 22, 2015. On August 10, 2015, the Company announced a cash dividend of $0.10 per common share in an aggregate amount of $1,880 that was paid on September 8, 2015, to shareholders of record on August 25, 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 Companys evaluation of market conditions and other factors and the program may be discontinued or suspended at any time. At September 30, 2015, the remaining balance available for repurchases under the program was $13,874.
The following is a summary of the Companys repurchases of common shares during the nine months ended September 30, 2015:
Period |
|
Number of |
|
Average |
|
Program Balance |
| ||
January 1 September 30, 2015 |
|
458 |
|
$ |
13.37 |
|
$ |
6,126 |
|
To enhance the Companys ability to repurchase shares, 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 Companys shareholders adopted and approved the Natures 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 Companys common stock were originally authorized for the granting of awards under the 2012 Incentive Plan. In January 2015, the Companys 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 Companys outstanding stock options include time-based stock options, which vest over differing periods ranging from the date of issuance up to 48 months from the option grant date; performance-based stock options, which 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 nine-month period ended September 30, 2015, is as follows:
|
|
Number of |
|
Weighted Average |
| |
Options outstanding at December 31, 2014 |
|
2,037 |
|
$ |
11.69 |
|
Granted |
|
310 |
|
14.27 |
| |
Forfeited or cancelled |
|
(268 |
) |
14.30 |
| |
Exercised |
|
(399 |
) |
9.79 |
| |
Options outstanding at September 30, 2015 |
|
1,680 |
|
12.20 |
| |
During the nine-month period ended September 30, 2015, the Company issued time-based stock options to purchase 310 shares of common stock under the 2012 Stock Incentive Plan to the Companys 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.
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the nine-month period ended September 30, 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 Companys 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 September 30, 2015, and 2014, was approximately $424 and $691, respectively; the related tax benefit was approximately $165 and $273, respectively. Share-based compensation expense from time-based stock options for the nine-month periods ended September 30, 2015, and 2014, was approximately $1,164 and $2,307, respectively; the related tax benefit was approximately $457 and $911, respectively. As of September 30, 2015, and December 31, 2014, the unrecognized share-based compensation expense related to the grants described above was $1,451 and $2,018, respectively. As of September 30, 2015, the remaining compensation cost is expected to be recognized over the weighted-average period of approximately 1.6 years.
The Company has not recognized any share-based compensation expense related to the net sales revenue performance-based stock options for the nine-month periods ended September 30, 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 $757 of potential share-based compensation expense.
At September 30, 2015, the aggregate intrinsic value of outstanding stock options to purchase 1,680 shares of common stock, exercisable stock options to purchase 902 shares of common stock and stock options to purchase 637 shares of common stock that are expected to vest was $1,383, $1,351 and $31, 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 Companys 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 September 30, 2015, and December 31, 2014, there were 43 and 32 vested RSUs given to the Board of Directors outstanding that had a remaining restriction period.
Restricted stock unit activity for the period ended September 30, 2015 is as follows:
|
|
Number of |
|
Weighted Average |
| |
Units outstanding at December 31, 2014 |
|
180 |
|
$ |
15.09 |
|
Granted |
|
675 |
|
12.64 |
| |
Issued |
|
(30 |
) |
13.63 |
| |
Forfeited or cancelled |
|
(77 |
) |
12.90 |
| |
Units outstanding at September 30, 2015 |
|
748 |
|
12.50 |
| |
During the nine-month period ended September 30, 2015, the Company granted 675 restricted stock units (RSUs) of common stock under the 2012 Incentive Plan to the Companys board, 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 $13.11 per share and vest in annual installments over a three year period from the grant date or after a three-year cliff. 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 upon achieving both (i) net sales and operating income targets over a three year period from the grant date and (ii) earnings per share targets over a six 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 discount from the market value of common shares reflecting the restriction embedded in the RSUs preventing the sale of the underlying shares over a certain period of time. The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. This model has gained recognition through its ability to address the magnitude of the discount by considering the volatility of a companys stock price and the length of restriction. The concept underpinning the Finnerty Model is that restricted stock cannot be sold over a certain period of time. 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 September 30, 2015, and 2014, was approximately $767 and $261, respectively; the related tax benefit was approximately $299 and $103, respectively. Share-based compensation expense from RSUs for the nine-month periods ended September 30, 2015, and 2014, was approximately $2,106 and $727, respectively; the related tax benefit was approximately $828 and $287 respectively. As of September 30, 2015, and December 31, 2014, the unrecognized share-based compensation expense related to the grants described above was $3,281 and $849, respectively. As of September 30, 2015, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 2.0 years.
The Company has not recognized any share-based compensation expense related to the net sales revenue and EPS performance-based RSUs for the nine-month periods ended September 30, 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 $2,900 of potential share-based compensation expense.
The number of shares issued upon vesting or exercise for restricted stock units granted, pursuant to the Companys share-based compensation plans, is net of shares withheld to cover the minimum statutory withholding requirements that the Company pays on behalf of its employees, which was eight shares for the nine-month period ended September 30, 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 Companys 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 Companys Stock Incentive Plans.
Stock appreciation right activity for the period ended September 30, 2015 is as follows:
|
|
Number of |
|
Weighted Average |
| |
Units outstanding at December 31, 2014 |
|
30 |
|
$ |
5.47 |
|
Granted |
|
|
|
|
| |
Forfeited or cancelled |
|
(10 |
) |
5.86 |
| |
Exercised |
|
|
|
|
| |
Units outstanding at September 30, 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 Companys 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 September 30, 2015, was $0; and the related tax benefit was approximately $0. Share-based compensation expense from SARs for the nine-month period ended September 30, 2015, was approximately $6 and the related tax benefit was approximately $3. As of September 30, 2015, and December 31, 2014, the unrecognized share-based compensation expense related to the grants described above was $47 and $150, respectively. As of September 30, 2015, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 1.8 years.
(10) 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 three business segments that operate under the Natures Sunshine® Products brand and are divided based on the characteristics of their Distributor base, similarities in compensation plans, as well as the internal organization of NSPs officers and their responsibilities (NSP Americas; NSP Russia, Central and Eastern Europe; and NSP China and New Markets). The Companys fourth 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; NSP Russia, Central and Eastern Europe; and NSP China and New Markets to warrant accounting for these operations as a separate business segment. The Companys China and New Markets segment is deploying a multi-channel go-to-market strategy that offers select Natures Sunshine branded products through a direct selling model across China as well as e-commerce. The time to market will be dependent upon regulatory processes including product registration and permit approvals. Due to a change in the Chinese regulatory environment, the Company has indefinitely deferred its entry into the retail channel. The China and New Markets segment also includes the Companys wholesale 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 Companys wholesale 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 wholesale business, in which the Company sells its 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 and United Kingdom markets, which were converted to wholesale markets during the prior year.
Reportable business segment information is as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
Net sales revenue: |
|
|
|
|
|
|
|
|
| ||||
NSP Americas |
|
$ |
44,483 |
|
$ |
45,774 |
|
$ |
136,043 |
|
$ |
138,447 |
|
NSP Russia, Central and Eastern Europe |
|
6,321 |
|
11,753 |
|
20,579 |
|
39,628 |
| ||||
Synergy WorldWide |
|
27,797 |
|
34,732 |
|
85,045 |
|
97,262 |
| ||||
China and New Markets |
|
985 |
|
1,147 |
|
3,044 |
|
4,367 |
| ||||
Total net sales revenue |
|
79,586 |
|
93,406 |
|
244,711 |
|
279,704 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Contribution margin (1): |
|
|
|
|
|
|
|
|
| ||||
NSP Americas |
|
18,685 |
|
18,968 |
|
57,232 |
|
56,819 |
| ||||
NSP Russia, Central and Eastern Europe |
|
2,287 |
|
4,186 |
|
7,197 |
|
14,145 |
| ||||
Synergy WorldWide |
|
8,809 |
|
12,010 |
|
26,677 |
|
34,495 |
| ||||
China and New Markets |
|
472 |
|
582 |
|
1,383 |
|
2,048 |
| ||||
Total contribution margin |
|
30,253 |
|
35,746 |
|
92,489 |
|
107,507 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative |
|
27,115 |
|
30,200 |
|
80,837 |
|
89,293 |
| ||||
Total operating income |
|
3,138 |
|
5,546 |
|
11,652 |
|
18,214 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income (expense), net |
|
(247 |
) |
(42 |
) |
(567 |
) |
(383 |
) | ||||
Income before provision for income taxes |
|
$ |
2,891 |
|
$ |
5,504 |
|
$ |
11,085 |
|
$ |
17,831 |
|
(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 and nine-month periods ended September 30, 2015 and 2014, as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
Net sales revenue: |
|
|
|
|
|
|
|
|
| ||||
United States |
|
$ |
36,603 |
|
$ |
36,209 |
|
$ |
112,179 |
|
$ |
112,507 |
|
South Korea |
|
12,191 |
|
16,252 |
|
36,341 |
|
42,959 |
| ||||
Other |
|
30,792 |
|
40,945 |
|
96,191 |
|
124,238 |
| ||||
|
|
$ |
79,586 |
|
$ |
93,406 |
|
$ |
244,711 |
|
$ |
279,704 |
|
Revenue generated by each of the Companys product lines is set forth below:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
NSP Americas: |
|
|
|
|
|
|
|
|
| ||||
General health |
|
$ |
20,119 |
|
$ |
19,704 |
|
$ |
59,607 |
|
$ |
59,522 |
|
Immune |
|
5,095 |
|
5,721 |
|
16,350 |
|
16,763 |
| ||||
Cardiovascular |
|
3,026 |
|
3,204 |
|
9,670 |
|
9,773 |
| ||||
Digestive |
|
12,521 |
|
13,489 |
|
39,149 |
|
40,859 |
| ||||
Personal care |
|
952 |
|
994 |
|
2,792 |
|
3,050 |
| ||||
Weight management |
|
2,770 |
|
2,662 |
|
8,475 |
|
8,480 |
| ||||
|
|
44,483 |
|
45,774 |
|
136,043 |
|
138,447 |
| ||||
NSP Russia, Central and Eastern Europe: |
|
|
|
|
|
|
|
|
| ||||
General health |
|
$ |
2,532 |
|
$ |
4,507 |
|
$ |
8,210 |
|
$ |
14,883 |
|
Immune |
|
770 |
|
1,492 |
|
2,446 |
|
4,960 |
| ||||
Cardiovascular |
|
391 |
|
730 |
|
1,290 |
|
2,457 |
| ||||
Digestive |
|
1,829 |
|
3,093 |
|
5,651 |
|
10,491 |
| ||||
Personal care |
|
563 |
|
1,410 |
|
2,072 |
|
4,746 |
| ||||
Weight management |
|
236 |
|
521 |
|
910 |
|
2,091 |
| ||||
|
|
6,321 |
|
11,753 |
|
20,579 |
|
39,628 |
| ||||
Synergy WorldWide: |
|
|
|
|
|
|
|
|
| ||||
General health |
|
$ |
11,381 |
|
$ |
12,367 |
|
$ |
32,317 |
|
$ |
34,809 |
|
Immune |
|
157 |
|
243 |
|
641 |
|
710 |
| ||||
Cardiovascular |
|
8,221 |
|
11,500 |
|
25,821 |
|
33,596 |
| ||||
Digestive |
|
4,016 |
|
6,069 |
|
12,938 |
|
16,039 |
| ||||
Personal care |
|
1,343 |
|
1,981 |
|
4,403 |
|
5,451 |
| ||||
Weight management |
|
2,679 |
|
2,572 |
|
8,925 |
|
6,657 |
| ||||
|
|
27,797 |
|
34,732 |
|
85,045 |
|
97,262 |
| ||||
China and New Markets |
|
|
|
|
|
|
|
|
| ||||
General health |
|
$ |
471 |
|
$ |
497 |
|
$ |
1,428 |
|
$ |
1,849 |
|
Immune |
|
123 |
|
145 |
|
384 |
|
583 |
| ||||
Cardiovascular |
|
70 |
|
65 |
|
224 |
|
256 |
| ||||
Digestive |
|
240 |
|
356 |
|
755 |
|
1,257 |
| ||||
Personal care |
|
24 |
|
20 |
|
70 |
|
74 |
| ||||
Weight management |
|
57 |
|
64 |
|
183 |
|
348 |
| ||||
|
|
985 |
|
1,147 |
|
3,044 |
|
4,367 |
| ||||
|
|
$ |
79,586 |
|
$ |
93,406 |
|
$ |
244,711 |
|
$ |
279,704 |
|
From an individual country perspective, only the United States comprised 10 percent or more of consolidated property, plant and equipment as follows:
|
|
September 30, |
|
December 31, |
| ||
Property, plant and equipment: |
|
|
|
|
| ||
United States |
|
$ |
62,390 |
|
$ |
48,013 |
|
Other |
|
2,693 |
|
3,330 |
| ||
Total property, plant and equipment |
|
$ |
65,083 |
|
$ |
51,343 |
|
(11) Income Taxes
For the three months ended September 30, 2015 and 2014, the Companys provision for income taxes, as a percentage of income before income taxes, was 44.4 percent and 7.4 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the nine months ended September 30, 2015 and 2014, the Companys provision (benefit) for income taxes, as a percentage of income before income taxes was 26.0 percent and (5.9) percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2015, was primarily attributed to current year foreign losses that presently do not provide future tax benefits, partially offset by adjustments to the valuation allowance on U.S. foreign tax credits.
The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2015, was primarily attributed to the valuation allowances on U.S. foreign tax credits and on U.S. capital loss carryforwards, partially offset by the impact of current year losses that presently do not provide a future tax benefit.
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2014, was primarily attributed to a decrease in tax liabilities associated with uncertain tax positions.
The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2014 was primarily attributed to a decrease in tax liabilities associated with uncertain tax positions and foreign tax credits arising from intercompany dividends of $32,800 paid by foreign subsidiaries to the U.S. corporation.
Changes to the effective rate due to unbenefited foreign losses, 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 Companys U.S. federal income tax returns for 2012 through 2014 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2008 through 2014.
As of September 30, 2015, the Company had accrued $6,978 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 Companys income tax provision and operating results in the period in which the Company makes such determination.
(12) 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 Companys business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. The Company maintains product liability, general liability and excess liability insurance coverage. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to the Company, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.
Non-Income Tax Contingencies
The Company has reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at managements best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. The Company provides provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters, including value-added taxes and sales tax. The Company provides provisions for U.S. state sales taxes in each of the states where the Company has nexus. As of September 30, 2015, and December 31, 2014, accrued liabilities include $325 and $2,760, 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 believes future payments related to these matters could range from $0 to approximately $2,600.
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 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 $700.
(13) Fair Value Measurements
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values of each financial instrument. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The following table presents the Companys hierarchy for its assets, measured at fair value on a recurring basis, as of September 30, 2015:
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
| ||||
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Total |
| ||||
Investments available-for-sale |
|
|
|
|
|
|
|
|
| ||||
U.S. government security funds |
|
$ |
1,786 |
|
$ |
|
|
$ |
|
|
$ |
1,786 |
|
Trading investment securities |
|
992 |
|
|
|
|
|
992 |
| ||||
Total assets measured at fair value on a recurring basis |
|
$ |
2,778 |
|
$ |
|
|
$ |
|
|
$ |
2,778 |
|
The following table presents the Companys hierarchy for its assets, measured at fair value on a recurring basis, as of December 31, 2014:
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
| ||||
|
|
Quoted Prices |
|
Significant |
|
Significant |
|
Total |
| ||||
Investments available-for-sale |
|
|
|
|
|
|
|
|
| ||||
Municipal obligations |
|
$ |
|
|
$ |
101 |
|
$ |
|
|
$ |
101 |
|
U.S. government security funds |
|
1,776 |
|
|
|
|
|
1,776 |
| ||||
Equity securities |
|
669 |
|
|
|
|
|
669 |
| ||||
Trading investment securities |
|
1,038 |
|
|
|
|
|
1,038 |
| ||||
Total assets measured at fair value on a recurring basis |
|
$ |
3,483 |
|
$ |
101 |
|
$ |
|
|
$ |
3,584 |
|
Investments available-for-sale The majority of the Companys investment portfolio consist of various securities such as state and municipal obligations, U.S. government security funds, short-term deposits and various equity securities. The Level 1 securities are valued using quoted prices for identical assets in active markets including equity securities and U.S. government treasuries. The Level 2 securities include investments in state and municipal obligations whereby all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.
Trading investment securities The majority of the Companys trading portfolio consists of various marketable securities that are valued using quoted prices in active markets.
For the nine months ended September 30, 2015, and for the year ended December 31, 2014, 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, accounts payable and the revolving credit facility payable approximate fair value due to their short-term nature. During the nine months ended September 30, 2015 and 2014, the Company did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this report, as well as the consolidated financial statements, the notes thereto, and managements discussion and analysis included in its Annual Report on Form 10-K for the year ended December 31, 2014, and its Reports on Form 8-K filed since the date of such Form 10-K. Certain information contained in Managements Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. These statements are based on managements expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. The Companys actual results, performance or achievements may differ materially from the results discussed in this Item 2 because of various factors, including those set forth elsewhere herein. See Cautionary Note Regarding Forward-Looking Statements.
Throughout this report, we refer to Natures Sunshine Products, Inc., together with its subsidiaries, as we, us, our, Company or the Company.
OVERVIEW
Natures Sunshine Products, Inc., together with its subsidiaries, is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. The Company is a Utah corporation with its principal place of business in Lehi, Utah, and sells its products to a sales force of independent Managers and Distributors who use the products themselves or resell them to other independent Distributors or customers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of its major product groups are subject to regulation by one or more governmental agencies.
The Company has four 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 its officers and their responsibilities and business operations. Three business segments operate under the Natures Sunshine Products brand (NSP Americas; NSP Russia, Central and Eastern Europe; and China and New Markets). The Companys China and New Markets segment is deploying a multi-channel go-to-market strategy that offers select Natures Sunshine branded products through a direct selling model across China as well as e-commerce. The time to market will be dependent upon regulatory processes including product registration and permit approvals. Due to a change in the Chinese regulatory environment, the Company has indefinitely deferred its entry into the retail channel. The China and New Markets segment also includes the Companys wholesale 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 Companys wholesale business to foreign markets outside of China detailed below. The wholesale business was previously part of NSP Americas. The fourth business segment operates under the Synergy® WorldWide brand.
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, and the United States. The Company markets its products through a wholesale model to Argentina, Australia, Chile, Israel, New Zealand, Norway, Peru and the United Kingdom. The Company discontinued operations in Vietnam during the second quarter of 2015, which were approximately 0.1 percent and 0.4 percent of consolidated net sales during the nine month periods ended September 30, 2015 and 2014, respectively.
In the third quarter of 2015, the Company experienced a decrease in its consolidated net sales of 14.8 percent (or 8.8 percent in local currencies) compared to the same period in 2014. NSP Russia, Central and Eastern Europe net sales decreased approximately 46.2 percent compared to the same period in 2014. Synergy WorldWide net sales decreased approximately 20.0 percent compared to the same period in 2014 (or 8.9 percent in local currencies). NSP Americas net sales decreased approximately 2.8 percent compared to the same period in 2014 (or increased 0.7 percent in local currencies). China and New Markets net sales decreased approximately 14.1 percent compared to the same period in 2014. During the third quarter of 2015, the Synergy Worldwide segment experienced net sales growth in local currencies in Japan, Thailand, and Indonesia and the NSP Americas segment experienced net sales growth in local currencies in North America. Excluding the NSP Russia, Central and Eastern Europe segment, net sales decreased by approximately 10.3% percent (or 3.6 percent in local currencies) during the third quarter of 2015. The strengthening of the U.S. dollar versus the local currencies of the Companys European, Latin American and Asian markets resulted in an approximate 8.8 percent or $5.6 million reduction of its net sales during the third quarter of 2015.
The Company expects that sales in NSP Russia, Central and Eastern Europe will continue to be affected by political unrest in Ukraine and Russia, sanctions against Russia and the significant impact of currency devaluation. It does not expect this decline in net sales to reverse in the near term. It remains strongly supportive and engaged with its independent Distributors in the region, and
believe its solid foundation and strong relationships in the region will allow it to reignite growth once the political situation and currency value stabilize.
In absolute terms, selling, general and administrative expenses decreased $3.1 million during the third quarter of 2015. Over the same period, selling, general and administrative costs as a percentage of net sales revenue for 2015, increased to 34.1 percent from 32.3 percent in 2014. The percentage increase was primarily the result of the decrease in net sales from the Companys NSP Russia, Central & Eastern Europe, the impact of foreign currency devaluation versus the U.S. dollar in certain of its other markets, and previously announced restructuring charges of approximately $0.3 million taken during the quarter as part of a plan to streamline operations as discussed below.
The Company distributes its products to consumers through an independent sales force comprised of Managers and Distributors, some of whom also consume its products. Typically a person who joins the Companys independent sales force begins as a Distributor. A Distributor may earn Manager status by committing more time and effort to selling the Companys products, recruiting productive independent Distributors and attaining certain product sales levels. On a worldwide basis, active Managers were approximately 13,000 and 15,500, and active Distributors and customers were approximately 256,800 and 298,000, at September 30, 2015 and 2014, respectively, primarily due to declines in our NSP Russia, Central and Eastern Europe segment as a result of the conditions noted above, as well as the conversion of the NSP Peru and United Kingdom markets to wholesale markets.
Net sales revenue represents net sales including shipping and handling revenues offset by volume rebates given to independent 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 independent Managers, Distributors and customers.
Volume incentives are a significant part of our direct sales marketing program, and represent commission payments made to our independent Managers and Distributors. These payments are designed to provide incentives for reaching higher sales levels and for recruiting additional independent 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.
In April 2015, the Company announced its plan to streamline its operations and refocus its activities on profitable growth opportunities. The planned streamlining is expected to reduce costs, improve efficiencies and renew focus on larger and more profitable Company markets. As part of the plan, the Company eliminated approximately 100 positions worldwide through both severance and attrition and ceased operations in Vietnam. The Company incurred $0.3 million of non-recurring expenses during the quarter. Net sales in Vietnam were approximately 0.1 and 0.4 percent of consolidated net sales for the nine months ended September 30, 2015 and 2014, respectively.
Most of our sales to independent 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 the Companys unaudited consolidated operating results from continuing operations in U.S. dollars and as a percentage of net sales revenue for the three months ended September 30, 2015 and 2014 (dollar amounts in thousands).
|
|
Three Months Ended |
|
Three Months Ended |
|
|
|
|
| |||||||
|
|
September 30, 2015 |
|
September 30, 2014 |
|
Change |
| |||||||||
|
|
Total |
|
Percent of |
|
Total |
|
Percent of |
|
Total |
|
|
| |||
|
|
dollars |
|
net sales |
|
dollars |
|
net sales |
|
dollars |
|
Percentage |
| |||
Net sales revenue |
|
$ |
79,586 |
|
100.0 |
% |
$ |
93,406 |
|
100.0 |
% |
$ |
(13,820 |
) |
(14.8 |
)% |
Cost of sales |
|
(20,643 |
) |
(25.9 |
) |
(22,742 |
) |
(24.3 |
) |
2,099 |
|
(9.2 |
) | |||
|
|
58,943 |
|
74.1 |
|
70,664 |
|
75.7 |
|
(11,721 |
) |
(16.6 |
) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Volume incentives |
|
28,690 |
|
36.0 |
|
34,918 |
|
37.4 |
|
(6,228 |
) |
(17.8 |
) | |||
SG&A expenses |
|
27,115 |
|
34.1 |
|
30,200 |
|
32.3 |
|
(3,085 |
) |
(10.2 |
) | |||
Operating income |
|
3,138 |
|
3.9 |
|
5,546 |
|
5.9 |
|
(2,408 |
) |
(43.4 |
) | |||
Other income (loss), net |
|
(247 |
) |
(0.3 |
) |
(42 |
) |
(0.0 |
) |
(205 |
) |
488.1 |
| |||
Income from continuing operations before income taxes |
|
2,891 |
|
3.6 |
|
5,504 |
|
5.9 |
|
(2,613 |
) |
(47.5 |
) | |||
Provision for income taxes |
|
1,284 |
|
1.6 |
|
407 |
|
0.4 |
|
877 |
|
215.5 |
| |||
Net income from continuing operations |
|
$ |
1,607 |
|
2.0 |
% |
$ |
5,097 |
|
5.5 |
% |
$ |
(3,490 |
) |
(68.5 |
)% |
The following table summarizes the Companys unaudited consolidated operating results from continuing operations in U.S. dollars and as a percentage of net sales revenue for the nine months ended September 30, 2015 and 2014 (dollar amounts in thousands).
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
|
|
| |||||||
|
|
September 30, 2015 |
|
September 30, 2014 |
|
Change |
| |||||||||
|
|
Total |
|
Percent of |
|
Total |
|
Percent of |
|
Total |
|
|
| |||
|
|
dollars |
|
net sales |
|
dollars |
|
net sales |
|
dollars |
|
Percentage |
| |||
Net sales revenue |
|
$ |
244,711 |
|
100.0 |
% |
$ |
279,704 |
|
100.0 |
% |
$ |
(34,993 |
) |
(12.5 |
)% |
Cost of sales |
|
(63,592 |
) |
(26.0 |
) |
(68,116 |
) |
(24.4 |
) |
4,524 |
|
(6.6 |
) | |||
|
|
181,119 |
|
74.0 |
|
211,588 |
|
75.6 |
|
(30,469 |
) |
(14.4 |
) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Volume incentives |
|
88,630 |
|
36.2 |
|
104,081 |
|
37.2 |
|
(15,451 |
) |
(14.8 |
) | |||
SG&A expenses |
|
80,837 |
|
33.0 |
|
89,293 |
|
31.9 |
|
(8,456 |
) |
(9.5 |
) | |||
Operating income |
|
11,652 |
|
4.8 |
|
18,214 |
|
6.5 |
|
(6,562 |
) |
(36.0 |
) | |||
Other income (loss), net |
|
(567 |
) |
(0.2 |
) |
(383 |
) |
(0.1 |
) |
(184 |
) |
48.0 |
| |||
Income from continuing operations before income taxes |
|
11,085 |
|
4.5 |
|
17,831 |
|
6.4 |
|
(6,746 |
) |
(37.8 |
) | |||
Provision (benefit) for income taxes |
|
2,880 |
|
1.2 |
|
(1,052 |
) |
(0.4 |
) |
3,932 |
|
(373.8 |
) | |||
Net income from continuing operations |
|
$ |
8,205 |
|
3.4 |
% |
$ |
18,883 |
|
6.8 |
% |
$ |
(10,678 |
) |
(56.5 |
)% |
Net Sales Revenue
The Companys international operations have provided and are expected to continue to provide, a significant portion of its total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how its 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, it compares 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 its 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. The Company believes presenting the impact of foreign currency fluctuations is useful to investors because it allows a more meaningful comparison of net sales of its 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 the Companys net sales revenue by operating segment with a reconciliation to net sales revenue excluding the impact of currency fluctuations for the three months ended September 30, 2015 and 2014 (dollar amounts in thousands);
|
|
Net Sales Revenue by Operating Segment |
| |||||||||||
|
|
Three Months |
|
Three Months |
|
Percent |
|
Impact of |
|
Percent |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
NSP Americas: |
|
|
|
|
|
|
|
|
|
|
| |||
NSP North America |
|
$ |
36,371 |
|
$ |
36,228 |
|
0.4 |
% |
$ |
(526 |
) |
1.8 |
% |
NSP Latin America |
|
8,112 |
|
9,546 |
|
(15.0 |
) |
(1,092 |
) |
(3.6 |
) | |||
|
|
44,483 |
|
45,774 |
|
(2.8 |
) |
(1,618 |
) |
0.7 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
NSP Russia, Central and Eastern Europe |
|
6,321 |
|
11,753 |
|
(46.2 |
) |
(124 |
) |
(45.2 |
) | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Synergy WorldWide: |
|
|
|
|
|
|
|
|
|
|
| |||
Synergy Asia Pacific |
|
18,915 |
|
23,426 |
|
(19.3 |
) |
(2,658 |
) |
(7.9 |
) | |||
Synergy Europe |
|
6,071 |
|
7,538 |
|
(19.5 |
) |
(1,173 |
) |
(3.9 |
) | |||
Synergy North America |
|
2,811 |
|
3,768 |
|
(25.4 |
) |
|
|
(25.4 |
) | |||
|
|
27,797 |
|
34,732 |
|
(20.0 |
) |
(3,831 |
) |
(8.9 |
) | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
China and New Markets |
|
985 |
|
1,147 |
|
(14.1 |
) |
|
|
(14.1 |
) | |||
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
$ |
79,586 |
|
$ |
93,406 |
|
(14.8 |
)% |
$ |
(5,573 |
) |
(8.8 |
)% |
The following table summarizes the changes in the Companys net sales revenue by operating segment with a reconciliation to net sales revenue excluding the impact of currency fluctuations for the nine months ended September 30, 2015 and 2014 (dollar amounts in thousands);
|
|
Net Sales Revenue by Operating Segment |
| |||||||||||
|
|
Nine Months |
|
Nine Months |
|
Percent |
|
Impact of |
|
Percent |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||