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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended 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

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

 

2500 West Executive Parkway, Suite 100
Lehi, Utah 84043

(Address of principal executive offices and zip code)

 

(801) 341-7900

(Registrant’s telephone number including area code)

 

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

 

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

 

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

 

 

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

 

The number of shares of Common Stock, no par value, outstanding on October 30, 2015, was 18,588,176 shares.

 

 

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NATURE’S SUNSHINE PRODUCTS, INC.

 

FORM 10-Q

 

For the Quarter Ended September 30, 2015

 

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Part I. Financial Information		4
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statement of Changes in Stockholders’ Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	40
Part II. Other Information		41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information included or incorporated herein by reference in this report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to the Company’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are more fully described in this report, including the risks set forth under “Risk Factors” in Item 1A, 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 Nature’s Sunshine Products, Inc., together with its subsidiaries, as “we,” “us,” “our Company” or “the Company.”

 

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PART I FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

 

		September 30, 2015			December 31, 2014
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			40,438
Deferred income tax assets		5,068			4,950
Prepaid expenses and other		7,324			7,884
Total current assets		104,759			121,249
Property, plant and equipment, net		65,083			51,343
Investment securities - trading		992			1,038
Intangible assets, net		581			704
Deferred income tax assets		14,807			14,495
Other assets		10,461			7,970
		$	196,683		$	196,799
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	5,673		$	5,237
Accrued volume incentives		16,126			16,867
Accrued liabilities		24,306			28,957
Deferred revenue		3,632			4,717
Income taxes payable		791			2,131
Revolving credit facility payable		1,199			—
Total current liabilities		51,727			57,909
Liability related to unrecognized tax benefits		6,978			6,598
Deferred compensation payable		992			1,038
Other liabilities		2,439			2,297
Total liabilities		62,136			67,842
Commitments and contingencies
Shareholders’ equity:
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		126,155			125,489
Retained earnings		16,265			10,891
Noncontrolling interests		3,108			3,781
Accumulated other comprehensive loss		(10,981		)	(11,204		)
Total shareholders’ equity		134,547			128,957
		$	196,683		$	196,799

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

		Three Months Ended September 30,
		2015			2014
Net sales revenue		$	79,586		$	93,406
Cost of sales		(20,643		)	(22,742		)
Gross profit		58,943			70,664
Operating expenses:
Volume incentives		28,690			34,918
Selling, general and administrative		27,115			30,200
Operating income		3,138			5,546
Other income (loss), net		(247		)	(42		)
Income from continuing operations before provision for income taxes		2,891			5,504
Provision for income taxes		1,284			407
Net income from continuing operations		1,607			5,097
Income (loss) from discontinued operations		804			(4,106		)
Net income		2,411			991
Net loss attributable to non-controlling interests		(355		)	(26		)
Net income attributable to common shareholders		$	2,766		$	1,017
Basic and diluted net income per common share
Basic:
Net income from continuing operations		$	0.09		$	0.29
Income (loss) from discontinued operations		$	0.04		$	(0.24	)
Net income attributable to common shareholders		$	0.15		$	0.06
Diluted:
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		$	0.06
Weighted average basic common shares outstanding		18,688			17,310
Weighted average diluted common shares outstanding		19,117			17,812
Dividends declared per common share		$	0.10		$	1.60

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

		Three Months Ended September 30,
		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.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

		Nine Months Ended September 30,
		2015			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

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		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.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

 

		Common Stock					Retained			Non- controlling			Accumulated Other Comprehensive
		Shares		Value			Earnings			Interests			Income (Loss)			Total
Balance at January 1, 2015		18,662		$	125,489		$	10,891		$	3,781		$	(11,204	)	$	128,957
Share-based compensation expense		—		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.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		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.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share information)

(Unaudited)

 

(1)                     Basis of Presentation

 

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

 

The Company markets its products in Australia, Austria, Belarus, Canada, Colombia, Costa Rica, the Czech Republic, Denmark, the Dominican Republic, Ecuador, El Salvador, Finland, Germany, Guatemala, Honduras, Hong Kong, Iceland, Indonesia, Ireland, Italy, Japan, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Moldova, Mongolia, the Netherlands, New Zealand, Nicaragua, Norway, Panama, the Philippines, Poland, Russia, Singapore, Slovenia, South Korea, Spain, Sweden, Taiwan, Thailand, Ukraine, the United Kingdom, 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 Company’s 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

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

 

Since June 30, 2012, Belarus has been designated as a highly inflationary economy. The U.S. dollar is the Company’s functional currency for this market. As a result, there were no resulting gains or losses from a re-measurement of the financial statements using official rates of the Company’s Belarusian subsidiary.  However, as a result of the weakening of the Belarusian ruble, the purchasing power of the Company’s independent Distributors in this market has diminished. During the three months ended September 30, 2015 and 2014, the Company’s Belarusian subsidiary’s 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 Company’s Belarusian subsidiary’s 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

 

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adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements and footnote disclosures.

 

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

 

The following table summarizes the operating results of the Company’s discontinued operations 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 Company’s operating cash flows during the nine months ended September 30, 2015.

 

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

 

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 Company’s 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.

 

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(7)                     Long-Term Debt and Revolving Credit Facility

 

The Company’s revolving credit agreement with Wells Fargo Bank, N.A., permits the Company to borrow up to $25,000 through September 1, 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

 

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

 

On February 25, 2015, the Company announced a cash dividend of $0.10 per common share in an aggregate amount of $1,865 that was paid on March 23, 2015, to shareholders of record on March 12, 2015. 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 Company’s 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 Company’s repurchases of common shares during the nine months ended September 30, 2015:

 

Period		Number of Shares		Average Price Paid per Share			Program Balance Used for Repurchases
January 1 — September 30, 2015		458		$	13.37		$	6,126

 

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

 

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

 

Stock Options

 

The Company’s outstanding stock options include time-based stock options, which vest over differing periods ranging from the date of issuance up to 48 months from the option grant date; performance-based stock options, which have already vested upon

 

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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 Shares		Weighted Average Exercise Price Per Share
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 Company’s Board of Directors and executive officers. These options were issued with a weighted-average exercise price of $14.27 per share and a weighted-average grant date fair value of $4.92 per share. All of the options issued have an option termination date of ten years from the option grant date.

 

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 Company’s historical and expected amount of dividend payouts, at the time of grant. On August 29, 2013, and September 19, 2014, the Company paid special non-recurring cash dividends of $1.50 per common share. The Company has excluded these special non-recurring cash dividends from the dividend yield used in the Black-Scholes option-pricing model calculations as it is not representative of future dividends to be declared by the Company.

 

Share-based compensation expense from time-based stock options for the three-month periods ended 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 Company’s outstanding restricted stock units (RSUs), include time-based RSUs, which vest over differing periods ranging from 12 months up to 48 months from the RSU grant date; performance-based RSUs, which vest upon achieving both cumulative annual net sales growth targets over a rolling one-year period and RSUs which vest upon achieving operating income and earnings per

 

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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 Shares		Weighted Average Grant Date Fair Value
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 Company’s 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 company’s stock price and the length of restriction. The concept underpinning the Finnerty Model is that restricted stock cannot be sold over a certain period of time. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model discount for lack of marketability is approximately 17.5 percent for a common share.

 

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

 

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Stock appreciation right activity for the period ended September 30, 2015 is as follows:

 

		Number of Shares		Weighted Average Grant Date Fair Value
Units outstanding at December 31, 2014		30		$	5.47
Granted		—		—
Forfeited or cancelled		(10	)	5.86
Exercised		—		—
Units outstanding at 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 Company’s historical and expected amount of dividend payouts, at the time of grant. On August 29, 2013, and September 19, 2014, the Company paid special non-recurring cash dividends of $1.50 per common share. The Company has excluded these special non-recurring cash dividends from the dividend yield used in the Black-Scholes SAR-pricing model calculations as it is not representative of future dividends to be declared by the Company.

 

Share-based compensation expense from SARs for the three-month period ended 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 Nature’s Sunshine® Products brand and are divided based on the characteristics of their Distributor base, similarities in compensation plans, as well as the internal organization of NSP’s officers and their responsibilities (NSP Americas; NSP Russia, Central and Eastern Europe; and NSP China and New Markets). The Company’s 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 Company’s  China and New Markets segment is deploying a multi-channel go-to-market strategy that offers select Nature’s 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 Company’s 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 Company’s 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.

 

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Reportable business segment information is as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		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 September 30,						Nine Months Ended September 30,
		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

 

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