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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
OR
☐ 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) | | | | | | | | |
Utah | | 87-0327982 |
(State or other jurisdiction of | | (IRS Employer |
incorporation or organization) | | Identification No.) |
2901 Bluegrass Boulevard, Suite 100
Lehi, Utah 84043
(Address of principal executive offices and zip code)
(801) 341-7900
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value | NATR | Nasdaq Capital Market |
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 ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and an “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | |
Large accelerated filer o | | Accelerated filer ☒ |
| | |
Non-accelerated filer o | | Smaller reporting company ☒ |
| | |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý.
The number of shares of Common Stock, no par value, outstanding on October 25, 2024, was 18,475,569 shares.
NATURE’S SUNSHINE PRODUCTS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2024
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included or incorporated herein by reference in this report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans, strategies and financial results, including expected improvement in gross profit and gross margin. All statements (other than statements of historical fact) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2023, but include the following:
•extensive government regulations to which the Company’s products, business practices and manufacturing activities are subject;
•registration of products for sale in foreign markets, or difficulty or increased cost of importing products into foreign markets;
•legal challenges to the Company’s direct selling program or to the classification of its independent consultants;
•laws and regulations regarding direct selling may prohibit or restrict our ability to sell our products in some markets or require us to make changes to our business model in some markets;
•liabilities and obligations arising from improper activity by the Company’s independent consultants;
•product liability claims;
•impact of anti-bribery laws, including the U.S. Foreign Corrupt Practices Act;
•the Company’s ability to attract and retain independent consultants;
•the loss of one or more key independent consultants who have a significant sales network;
•potential for increased liability and compliance costs relating to the Company’s joint venture for operations in China with Fosun Industrial Co., Ltd.;
•the effect of fluctuating foreign exchange rates;
•failure of the Company’s independent consultants to comply with advertising laws;
•changes to the Company’s independent consultants' compensation plans;
•geopolitical issues and conflicts;
•negative consequences resulting from difficult economic conditions, including the availability of liquidity or the willingness of the Company’s customers to purchase products;
•risks associated with the manufacturing of the Company’s products;
•supply chain disruptions, manufacturing interruptions or delays, or the failure to accurately forecast customer demand;
•failure to timely and effectively obtain shipments of products from our manufacturers and deliver products to our independent consultants and customers;
•world-wide slowdowns and delays related to supply chain, ingredient shortages and logistical challenges;
•uncertainties relating to the application of transfer pricing, duties, value-added taxes, and other tax regulations, and changes thereto;
•changes in tax laws, treaties or regulations, or their interpretation;
•failure to maintain an effective system of internal controls over financial reporting;
•cybersecurity threats and exposure to data loss;
•the storage, processing, and use of data, some of which contain personal information, are subject to complex and evolving privacy and data protection laws and regulations;
•reliance on information technology infrastructure; and
•the sufficiency of trademarks and other intellectual property rights.
All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report. Throughout this report, we refer to Nature’s Sunshine Products, Inc., together with our subsidiaries, as "we," "us," "our," "our Company" or “the Company.”
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, 2024 | | December 31, 2023 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 78,704 | | | $ | 82,373 | |
Accounts receivable, net of allowance for doubtful accounts of $86 and $142, respectively | 11,396 | | | 8,827 | |
| | | |
| | | |
Inventories | 62,298 | | | 66,895 | |
Prepaid expenses and other | 11,131 | | | 7,722 | |
Total current assets | 163,529 | | | 165,817 | |
| | | |
Property, plant and equipment, net | 41,994 | | | 45,000 | |
Operating lease right-of-use assets | 13,815 | | | 13,361 | |
Investment securities - trading | 892 | | | 747 | |
| | | |
Deferred income tax assets | 14,941 | | | 15,064 | |
Other assets | 10,162 | | | 9,784 | |
Total assets | $ | 245,333 | | | $ | 249,773 | |
| | | |
Liabilities and Shareholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 8,875 | | | $ | 7,910 | |
Accrued volume incentives and service fees | 21,958 | | | 22,922 | |
Accrued liabilities | 24,011 | | | 33,162 | |
Deferred revenue | 1,747 | | | 1,794 | |
| | | |
| | | |
Income taxes payable | 6,522 | | | 6,418 | |
Current portion of operating lease liabilities | 4,037 | | | 4,547 | |
| | | |
Total current liabilities | 67,150 | | | 76,753 | |
| | | |
Liability related to unrecognized tax benefits | 651 | | | 312 | |
Long-term portion of operating lease liabilities | 11,237 | | | 10,376 | |
| | | |
| | | |
Deferred compensation payable | 892 | | | 747 | |
Deferred income tax liabilities | 1,346 | | | 1,401 | |
Other liabilities | 1,440 | | | 644 | |
Total liabilities | 82,716 | | | 90,233 | |
| | | |
Commitments and contingencies | | | |
| | | |
Shareholders’ equity: | | | |
Common stock, no par value, 50,000 shares authorized, 18,498 and 18,875 shares issued and outstanding, respectively | 113,946 | | | 119,694 | |
Retained earnings | 57,728 | | | 49,711 | |
Noncontrolling interest | 6,089 | | | 5,482 | |
Accumulated other comprehensive loss | (15,146) | | | (15,347) | |
Total shareholders’ equity | 162,617 | | | 159,540 | |
Total liabilities and shareholders’ equity | $ | 245,333 | | | $ | 249,773 | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share information)
(Unaudited) | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2024 | | 2023 |
Net sales | $ | 114,615 | | | $ | 111,202 | |
Cost of sales | 32,856 | | | 29,964 | |
Gross profit | 81,759 | | | 81,238 | |
| | | |
Operating expenses: | | | |
Volume incentives | 35,521 | | | 34,118 | |
Selling, general and administrative | 40,954 | | | 41,288 | |
Operating income | 5,284 | | | 5,832 | |
Other income (loss), net | 2,615 | | | (927) | |
Income before provision for income taxes | 7,899 | | | 4,905 | |
Provision for income taxes | 3,253 | | | 1,763 | |
Net income | 4,646 | | | 3,142 | |
Net income attributable to noncontrolling interests | 299 | | | 310 | |
Net income attributable to common shareholders | $ | 4,347 | | | $ | 2,832 | |
| | | |
Basic and diluted net income per common share: | | | |
| | | |
| | | |
| | | |
| | | |
Basic earnings per share attributable to common shareholders | $ | 0.23 | | | $ | 0.15 | |
| | | |
| | | |
| | | |
| | | |
Diluted earnings per share attributable to common shareholders | $ | 0.23 | | | $ | 0.15 | |
| | | |
Weighted average basic common shares outstanding | 18,512 | | | 19,133 | |
Weighted average diluted common shares outstanding | 18,890 | | | 19,492 | |
| | | |
| | | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share information)
(Unaudited) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
Net sales | $ | 336,159 | | | $ | 336,384 | |
Cost of sales | 96,535 | | | 93,580 | |
Gross profit | 239,624 | | | 242,804 | |
| | | |
Operating expenses: | | | |
Volume incentives | 103,784 | | | 102,560 | |
Selling, general and administrative | 120,295 | | | 127,203 | |
Operating income | 15,545 | | | 13,041 | |
Other income (loss), net | 1,432 | | | (500) | |
Income before provision for income taxes | 16,977 | | | 12,541 | |
Provision for income taxes | 8,353 | | | 5,469 | |
Net income | 8,624 | | | 7,072 | |
Net income attributable to noncontrolling interests | 607 | | | 958 | |
Net income attributable to common shareholders | $ | 8,017 | | | $ | 6,114 | |
| | | |
Basic and diluted net income per common share: | | | |
| | | |
| | | |
| | | |
| | | |
Basic earnings per share attributable to common shareholders | $ | 0.43 | | | $ | 0.32 | |
| | | |
| | | |
| | | |
| | | |
Diluted earnings per share attributable to common shareholders | $ | 0.42 | | | $ | 0.31 | |
| | | |
Weighted average basic common shares outstanding | 18,661 | | | 19,093 | |
Weighted average diluted common shares outstanding | 19,115 | | | 19,450 | |
| | | |
| | | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited) | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2024 | | 2023 |
Net income | $ | 4,646 | | | $ | 3,142 | |
Foreign currency translation gain (loss) (net of tax) | 1,639 | | | (593) | |
| | | |
| | | |
| | | |
Total comprehensive income | $ | 6,285 | | | $ | 2,549 | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
Net income | $ | 8,624 | | | $ | 7,072 | |
Foreign currency translation gain (loss) (net of tax) | 201 | | | (3,491) | |
| | | |
| | | |
Total comprehensive income | $ | 8,825 | | | $ | 3,581 | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Retained Earnings | | Noncontrolling Interest | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | | | | |
Balance at December 31, 2023 | 18,875 | | | $ | 119,694 | | | $ | 49,711 | | | $ | 5,482 | | | $ | (15,347) | | | $ | 159,540 | |
Share-based compensation expense | — | | | 1,369 | | | — | | | — | | | — | | | 1,369 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 16 | | | (152) | | | — | | | — | | | — | | | (152) | |
Repurchase of common stock | (105) | | | (1,848) | | | — | | | — | | | — | | | (1,848) | |
Net income | — | | | — | | | 2,321 | | | 169 | | | — | | | 2,490 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (1,692) | | | (1,692) | |
Balance at March 31, 2024 | 18,786 | | | $ | 119,063 | | | $ | 52,032 | | | $ | 5,651 | | | $ | (17,039) | | | $ | 159,707 | |
Share-based compensation expense | — | | | 1,261 | | | — | | | — | | | — | | | 1,261 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 70 | | | (434) | | | — | | | — | | | — | | | (434) | |
Repurchase of common stock | (348) | | | (5,876) | | | — | | | — | | | — | | | (5,876) | |
Net income | — | | | — | | | 1,349 | | | 139 | | | — | | | 1,488 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 254 | | | 254 | |
Balance at June 30, 2024 | 18,508 | | | $ | 114,014 | | | $ | 53,381 | | | $ | 5,790 | | | $ | (16,785) | | | $ | 156,400 | |
Share-based compensation expense | — | | | 950 | | | — | | | — | | | — | | | 950 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 46 | | | (307) | | | — | | | — | | | — | | | (307) | |
Repurchase of common stock | (56) | | | (711) | | | — | | | — | | | — | | | (711) | |
Net income | — | | | — | | | 4,347 | | | 299 | | | — | | | 4,646 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 1,639 | | | 1,639 | |
Balance at September 30, 2024 | 18,498 | | | $ | 113,946 | | | $ | 57,728 | | | $ | 6,089 | | | $ | (15,146) | | | $ | 162,617 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Retained Earnings | | Noncontrolling Interest | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | | | | |
Balance at December 31, 2022 | 19,093 | | | $ | 121,583 | | | $ | 34,635 | | | $ | 4,142 | | | $ | (13,313) | | | $ | 147,047 | |
Share-based compensation expense | — | | | 1,058 | | | — | | | — | | | — | | | 1,058 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 42 | | | (165) | | | — | | | — | | | — | | | (165) | |
Repurchase of common stock | (90) | | | (823) | | | — | | | — | | | — | | | (823) | |
Net income | — | | | — | | | 860 | | | 393 | | | — | | | 1,253 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (1,653) | | | (1,653) | |
Balance at March 31, 2023 | 19,045 | | | $ | 121,653 | | | $ | 35,495 | | | $ | 4,535 | | | $ | (14,966) | | | $ | 146,717 | |
Share-based compensation expense | — | | | 1,437 | | | — | | | — | | | — | | | 1,437 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 62 | | | (91) | | | — | | | — | | | — | | | (91) | |
Repurchase of common stock | (9) | | | (97) | | | — | | | — | | | — | | | (97) | |
Net income | — | | | — | | | 2,422 | | | 255 | | | — | | | 2,677 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (1,245) | | | (1,245) | |
Balance at June 30, 2023 | 19,098 | | | $ | 122,902 | | | $ | 37,917 | | | $ | 4,790 | | | $ | (16,211) | | | $ | 149,398 | |
Share-based compensation expense | — | | | 1,295 | | | — | | | — | | | — | | | 1,295 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 80 | | | 77 | | | — | | | — | | | — | | | 77 | |
Repurchase of common stock | (81) | | | (1,308) | | | — | | | — | | | — | | | (1,308) | |
Net income | — | | | — | | | 2,832 | | | 310 | | | — | | | 3,142 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (593) | | | (593) | |
Balance at September 30, 2023 | 19,097 | | | $ | 122,966 | | | $ | 40,749 | | | $ | 5,100 | | | $ | (16,804) | | | $ | 152,011 | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 8,624 | | | $ | 7,072 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Provision for doubtful accounts | — | | | 45 | |
Depreciation and amortization | 10,195 | | | 8,763 | |
Non-cash lease expense | 4,386 | | | 3,290 | |
Share-based compensation expense | 3,580 | | | 3,790 | |
Loss on sale of property, plant and equipment | 1,330 | | | — | |
Deferred income taxes | 26 | | | (2,986) | |
Purchase of trading investment securities | (126) | | | — | |
Proceeds from sale of trading investment securities | 95 | | | 76 | |
Realized and unrealized gains on investments | (113) | | | (66) | |
Foreign exchange losses (gains) | (1,111) | | | 687 | |
Changes in assets and liabilities: | | | |
Accounts receivable | (2,563) | | | 3,955 | |
Inventories | 4,392 | | | 423 | |
Prepaid expenses and other current assets | (3,588) | | | (1,091) | |
Other assets | (444) | | | 733 | |
Accounts payable | 838 | | | 917 | |
Accrued volume incentives and service fees | (876) | | | 2,102 | |
Accrued liabilities | (7,759) | | | 7,416 | |
Deferred revenue | (46) | | | (877) | |
Lease liabilities | (4,492) | | | (3,414) | |
Income taxes payable | 180 | | | 803 | |
Liability related to unrecognized tax benefits | 442 | | | — | |
Deferred compensation payable | 144 | | | (10) | |
Net cash provided by operating activities | 13,114 | | | 31,628 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property, plant and equipment | (8,776) | | | (9,230) | |
| | | |
| | | |
| | | |
Net cash used in investing activities | (8,776) | | | (9,230) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| | | |
Principal payments of long-term debt | — | | | (958) | |
Proceeds from revolving credit facility | 40,172 | | | 13,503 | |
Principal payments of revolving credit facility | (40,172) | | | (13,503) | |
| | | |
| | | |
| | | |
Payments related to tax withholding for net-share settled equity awards | (893) | | | (179) | |
| | | |
Repurchase of common stock | (8,436) | | | (2,228) | |
Net cash used in financing activities | (9,329) | | | (3,365) | |
Effect of exchange rates on cash and cash equivalents | 1,322 | | | (3,029) | |
Net increase (decrease) in cash and cash equivalents | (3,669) | | | 16,004 | |
Cash and cash equivalents at the beginning of the period | 82,373 | | | 60,032 | |
Cash and cash equivalents at the end of the period | $ | 78,704 | | | $ | 76,036 | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | |
Cash paid for income taxes, net of refunds | $ | 9,782 | | | $ | 7,460 | |
Cash paid for interest | 141 | | | 124 | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
We are a natural health and wellness company primarily engaged in the manufacture and sale of nutritional and personal care products. We are a Utah corporation with our principal place of business in Lehi, Utah, and sell our products directly to customers and to a sales force of independent consultants who use the products themselves or resell them to consumers.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") 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 the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All 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 our financial information as of September 30, 2024, and for the three and nine-month periods ended September 30, 2024 and 2023. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2024.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities, in these financial statements and accompanying notes. Actual results could differ from these estimates and those differences could have a material effect on our financial position and results of operations.
The significant accounting estimates inherent in the preparation of our financial statements include estimates associated with our determination of liabilities related to independent consultant incentives, the determination of income tax assets and liabilities, certain other non-income tax and value-added tax contingencies, and legal contingencies. In addition, significant estimates form the basis for allowances with respect to inventory valuations. Various assumptions and other factors enter into the determination of these significant estimates. The process of determining significant estimates takes into account historical experience and current and expected economic conditions.
Noncontrolling Interests
Noncontrolling interests changed as a result of the net income attributable to noncontrolling interests of $0.3 million and $0.6 million for the three and nine months ended September 30, 2024, respectively. Net income attributable to the noncontrolling interests was $0.3 million and $1.0 million for the three and nine months ended September 30, 2023, respectively. As of September 30, 2024 and December 31, 2023, noncontrolling interests were $6.1 million and $5.5 million, respectively.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU provides additional guidance on the improved reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. In addition, the amendments improve interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The amendments in this update were effective as of December 15, 2023. The adoption of this ASU did not have a significant impact on our Consolidated Financial Statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU provides additional guidance on the disclosure of income taxes on an annual basis and requires all public business entities to disclose specific categories in the rate reconciliation, provide additional information on reconciling items, additional information about income taxes paid, and additional information about income tax expense from continuing operation. The amendments in this update are effective as of December 15, 2024. The adoption of this ASU is not expected to have a significant impact on our Consolidated Financial Statements.
(2) Inventories
The composition of inventories is as follows (dollar amounts in thousands): | | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Raw materials | $ | 17,635 | | | $ | 18,301 | |
Work in progress | 1,187 | | | 1,218 | |
Finished goods | 43,476 | | | 47,376 | |
Total inventories | $ | 62,298 | | | $ | 66,895 | |
(3) Investment Securities - Trading
Our trading securities portfolio totaled $0.9 million at September 30, 2024, and $0.7 million at December 31, 2023, and generated gains of $41,000 and losses of $26,000 for the three months ended September 30, 2024 and 2023, respectively, and gains of $0.1 million and $0.1 million for the nine months ended September 30, 2024 and 2023, respectively.
(4) Revolving Credit Facility and Other Obligations
On July 11, 2017, we entered into a revolving credit agreement with Bank of America, N.A., with a borrowing limit of $25.0 million (the “Credit Agreement”). On June 23, 2022, the Credit Agreement was amended to extend the term to mature on July 1, 2027. On September 11, 2024, the Credit Agreement was amended to modify the calculation of interest. Interest under the amended Credit Agreement is the greater of SOFR Daily Floating Rate or the Index Floor, plus 1.50 percent (6.45 percent as of September 30, 2024), and an annual commitment fee of 0.25 percent on the unused portion of the commitment. At September 30, 2024 and December 31, 2023, there was no outstanding balance under the Credit Agreement.
The Credit Agreement contains customary financial covenants, including financial covenants relating to our solvency and leverage. In addition, the Credit Agreement restricts certain capital expenditures, lease expenditures, other indebtedness, liens on assets, guarantees, loans and advances, dividends, mergers, consolidations and transfers of assets except as permitted in the Credit Agreement. The Credit Agreement is collateralized by our manufacturing facility, accounts receivable, inventories and other assets. As of September 30, 2024, we were in compliance with the debt covenants set forth in the Credit Agreement.
(5) 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, 2024 and 2023 (dollar and share amounts in thousands, except for per share information): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to common shareholders | $ | 4,347 | | | $ | 2,832 | | | $ | 8,017 | | | $ | 6,114 | |
| | | | | | | |
Basic weighted average shares outstanding | 18,512 | | | 19,133 | | | 18,661 | | | 19,093 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Basic earnings per share attributable to common shareholders | $ | 0.23 | | | $ | 0.15 | | | $ | 0.43 | | | $ | 0.32 | |
| | | | | | | |
Diluted shares outstanding: | | | | | | | |
Basic weighted-average shares outstanding | 18,512 | | | 19,133 | | | 18,661 | | | 19,093 | |
Stock-based awards | 378 | | | 359 | | | 454 | | | 357 | |
Diluted weighted-average shares outstanding | 18,890 | | | 19,492 | | | 19,115 | | | 19,450 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Diluted earnings per share attributable to common shareholders | $ | 0.23 | | | $ | 0.15 | | | $ | 0.42 | | | $ | 0.31 | |
| | | | | | | |
Dilutive shares excluded from diluted-per-share amounts: | | | | | | | |
Share-based awards | 754 | | | 735 | | | 754 | | | 735 | |
| | | | | | | |
Anti-dilutive shares excluded from diluted-per-share amounts: | | | | | | | |
Share-based awards | — | | | 25 | | | — | | | 50 | |
Potentially dilutive shares excluded from diluted-per-share amounts include performance-based restricted stock units, for which certain 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.
(6) Capital Transactions
Dividends
The declaration of future dividends is subject to the discretion of our Board of Directors and will depend upon numerous factors, including earnings, financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.
Share Repurchase Program
On March 10, 2021, we announced a $15.0 million common share repurchase program. On March 8, 2022, we announced an amendment to the share repurchase program allowing the repurchase of an additional $30.0 million in common shares. The repurchases may be made from time to time as market conditions warrant and are subject to regulatory considerations. For the nine months ended September 30, 2024 and 2023, we repurchased 509,000 and 180,000 shares of our common stock for $8.4 million and $2.2 million, respectively. At September 30, 2024, the remaining balance available for repurchases under the program was $9.2 million.
Share-Based Compensation
On August 1, 2012, our shareholders adopted and approved the Nature’s Sunshine Products, Inc. 2012 Stock Incentive Plan ("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 1,500,000 shares of our common stock were originally authorized for the granting of awards under the 2012 Incentive Plan. In 2015, our shareholders approved an amendment to the 2012 Incentive Plan, to increase the number of shares of common stock reserved for issuance by 1,500,000 shares. On May 5, 2021, our shareholders approved the Amended and Restated 2012 Stock Incentive Plan, which among other amendments, increased the number of shares of common stock reserved for issuance by 2,000,000 shares and extended the term of the 2012 Incentive Plan to March 3, 2026. The number of shares available for awards, as well as the terms of outstanding awards, are subject to adjustment as provided in the Amended and Restated 2012 Incentive Plan for stock splits, stock dividends, recapitalizations and other similar events.
Stock Options
Our outstanding stock options include time-based stock options, which vest over differing periods of time ranging from the date of issuance to up to 48 months from the option grant date, and 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.
Stock option activity for the nine-month period ended September 30, 2024, is as follows (amounts in thousands, except per share information): | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Grant Date Fair Value |
Options outstanding at December 31, 2023 | 75 | | | $ | 11.25 | | | $ | 3.85 | |
Granted | — | | | — | | | — | |
Forfeited or canceled | — | | | — | | | — | |
Exercised | — | | | — | | | — | |
Options outstanding at September 30, 2024 | 75 | | | $ | 11.25 | | | $ | 3.85 | |
There was no share-based compensation expense for the three- and nine-month periods ended September 30, 2024 and 2023. As of September 30, 2024 and December 31, 2023, there was no unrecognized share-based compensation expense related to the grants described above.
At September 30, 2024, the aggregate intrinsic value of outstanding and exercisable stock options to purchase 75,000 shares of common stock was $0.2 million. At December 31, 2023, the aggregate intrinsic value of outstanding and exercisable options to purchase 75,000 shares of common stock was $0.5 million.
For the nine months ended September 30, 2024, no shares of common stock were issued upon the exercise of stock options. For the nine months ended September 30, 2023, we issued 27,000 shares of common stock upon the exercise of stock options at an average exercise price of $13.88 per share. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2023, was $0.1 million and the Company recognized $0.1 million of tax benefits from the exercise of stock options.
As of September 30, 2024 and December 31, 2023, we did not have any unvested stock options outstanding.
Restricted Stock Units
Our outstanding restricted stock units (“RSUs”), include time-based RSUs, which vest over differing periods of time ranging from 12 months to up to 36 months from the RSU grant date, as well as performance-based RSUs, which vest upon achieving targets relating to adjusted EBITDA growth, and/or stock price levels. RSUs granted to members of the Board of Directors contain a restriction period in which the shares are not issued until two years after vesting. At September 30, 2024 and December 31, 2023, there were 110,000 and 100,000 vested RSUs, respectively, granted to the Board of Directors with an accompanying restriction period.
Restricted stock unit activity for the nine-month period ended September 30, 2024, is as follows (amounts in thousands, except per share information): | | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Restricted Stock Units outstanding at December 31, 2023 | 1,342 | | | $ | 11.21 | |
Granted | 390 | | | 17.09 | |
Forfeited | (197) | | | 14.19 | |
Issued | (196) | | | 12.42 | |
Restricted Stock Units outstanding at September 30, 2024 | 1,339 | | | 12.31 | |
During the nine-month period ended September 30, 2024, we granted 390,000 RSUs under the 2012 Incentive Plan to the Board of Directors, executive officers and other employees, which were comprised of time-based RSUs, and adjusted EBITDA performance-based RSUs. The time-based RSUs were issued with a weighted-average grant date fair value of $16.96 per share and vest in 12 monthly installments over a one-year period from the grant date or in annual installments over a three-year period from the grant date. The adjusted EBITDA performance-based RSUs were issued with a weighted-average grant date fair value of $17.25 per share and vest upon achieving adjusted EBITDA targets and maintaining those targets over a four-quarter period from the grant date.
Share-based compensation expense related to time-based RSUs for the three-month periods ended September 30, 2024 and 2023, was approximately $0.7 million and $1.0 million, respectively. Share-based compensation expense related to time-based RSUs for the nine-month periods ended September 30, 2024 and 2023, was approximately $2.6 million and $2.9 million, respectively. As of September 30, 2024 and December 31, 2023, the unrecognized share-based compensation expense related to the grants described above, excluding incentive awards discussed below, was $3.2 million and $3.5 million, respectively. The remaining compensation expense is expected to be recognized over the weighted average period of approximately 0.8 years.
Share-based compensation expense related to performance-based RSUs for the three-month periods ended September 30, 2024 and 2023, was $0.3 million and $0.3 million, respectively. Share-based compensation expense related to performance-based RSUs for the nine-month periods ended September 30, 2024 and 2023, was $0.9 million and $0.9 million, respectively. Should we attain all the metrics related to performance-based RSU grants, we would recognize up to $7.5 million of potential share-based compensation expense. We currently expect to recognize an additional $2.7 million of that potential share-based compensation expense.
The number of shares issued upon vesting of RSUs granted pursuant to our share-based compensation plans is net of the minimum statutory withholding requirements that we pay on behalf of our employees, which was 63,000 and 48,000 shares for the nine-month periods ended September 30, 2024 and 2023, respectively. 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.
(7) Segment Information
We have four business segments (Asia, Europe, North America, and Latin America and Other) based primarily upon the geographic region where each segment operates, as well as the internal organization of our officers and their responsibilities. The geographic segments operate under the Nature’s Sunshine Products and Synergy WorldWide® brands. The Latin America and Other segment includes our wholesale business in which we sell products to various locally-managed entities independent of the Company that we have granted distribution rights for in the relevant market.
Net sales 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. We evaluate performance based on contribution margin by segment before consideration of certain inter-segment transfers and expenses.
Reportable business segment information is as follows (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net sales: | | | | | | | |
Asia | $ | 55,293 | | | $ | 52,218 | | | $ | 151,497 | | | $ | 153,438 | |
Europe | 19,615 | | | 18,769 | | | 63,513 | | | 61,410 | |
North America | 33,631 | | | 34,792 | | | 103,719 | | | 104,098 | |
Latin America and Other | 6,076 | | | 5,423 | | | 17,430 | | | 17,438 | |
Total net sales | 114,615 | | | 111,202 | | | 336,159 | | | 336,384 | |
| | | | | | | |
Contribution margin (1): | | | | | | | |
Asia | 25,103 | | | 24,861 | | | 70,316 | | | 73,711 | |
Europe | 6,286 | | | 5,993 | | | 20,786 | | | 18,659 | |
North America | 12,203 | | | 14,222 | | | 38,103 | | | 40,985 | |
Latin America and Other | 2,646 | | | 2,044 | | | 6,635 | | | 6,889 | |
Total contribution margin | 46,238 | | | 47,120 | | | 135,840 | | | 140,244 | |
| | | | | | | |
Selling, general and administrative expenses (2) | 40,954 | | | 41,288 | | | 120,295 | | | 127,203 | |
Operating income | 5,284 | | | 5,832 | | | 15,545 | | | 13,041 | |
| | | | | | | |
Other income (loss), net | 2,615 | | | (927) | | | 1,432 | | | (500) | |
Income before provision for income taxes | $ | 7,899 | | | $ | 4,905 | | | $ | 16,977 | | | $ | 12,541 | |
_________________________________________
(1) Contribution margin consists of net sales less cost of sales and volume incentives expense.
(2) Service fees in China totaled $3.5 million and $10.4 million for the three and nine-month periods ended September 30, 2024, respectively, compared to $4.0 million and $12.9 million for the three and nine-month periods ended September 30, 2023. These service fees are included in selling, general and administrative expenses.
From an individual country/region perspective, the United States, Taiwan and South Korea comprise 10 percent or more of consolidated net sales for the three and nine-month periods ended September 30, 2024 and 2023, as follows (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net sales: | | | | | | | |
United States | $ | 30,973 | | | $ | 32,240 | | | $ | 95,609 | | | $ | 96,314 | |
Taiwan | 18,389 | | | 15,598 | | | 50,489 | | | 45,814 | |
South Korea | 13,894 | | | 13,921 | | | 38,964 | | | 38,993 | |
Other | 51,359 | | | 49,443 | | | 151,097 | | | 155,263 | |
| $ | 114,615 | | | $ | 111,202 | | | $ | 336,159 | | | $ | 336,384 | |
Net sales generated by each of our product lines is set forth below (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Asia | | | | | | | |
General health | $ | 22,572 | | | $ | 16,937 | | | $ | 57,697 | | | $ | 48,859 | |
Immune | 2,504 | | | 1,964 | | | 6,437 | | | 3,738 | |
Cardiovascular | 14,556 | | | 14,963 | | | 42,155 | | | 44,698 | |
Digestive | 10,905 | | | 9,186 | | | 27,201 | | | 30,172 | |
Personal care | 1,175 | | | 1,376 | | | 3,511 | | | 4,159 | |
Weight management | 3,581 | | | 7,792 | | | 14,496 | | | 21,812 | |
| 55,293 | | | 52,218 | | | 151,497 | | | 153,438 | |
Europe | | | | | | | |
General health | $ | 9,194 | | | $ | 8,034 | | | $ | 28,530 | | | $ | 25,823 | |
Immune | 1,685 | | | 1,563 | | | 6,223 | | | 5,988 | |
Cardiovascular | 2,997 | | | 2,264 | | | 7,712 | | | 7,085 | |
Digestive | 3,675 | | | 5,087 | | | 15,535 | | | 17,156 | |
Personal care | 765 | | | 1,348 | | | 3,178 | | | 3,779 | |
Weight management | 1,299 | | | 473 | | | 2,335 | | | 1,579 | |
| 19,615 | | | 18,769 | | | 63,513 | | | 61,410 | |
North America | | | | | | | |
General health | $ | 15,259 | | | $ | 16,334 | | | $ | 46,698 | | | $ | 47,725 | |
Immune | 3,690 | | | 3,641 | | | 11,675 | | | 11,693 | |
Cardiovascular | 3,630 | | | 3,634 | | | 11,371 | | | 10,983 | |
Digestive | 8,583 | | | 8,577 | | | 26,306 | | | 26,069 | |
Personal care | 1,512 | | | 1,720 | | | 4,665 | | | 4,818 | |
Weight management | 957 | | | 886 | | | 3,004 | | | 2,810 | |
| 33,631 | | | 34,792 | | | 103,719 | | | 104,098 | |
Latin America and Other | | | | | | | |
General health | $ | 1,753 | | | $ | 1,480 | | | $ | 4,887 | | | $ | 4,717 | |
Immune | 589 | | | 611 | | | 1,906 | | | 2,023 | |
Cardiovascular | 448 | | | 392 | | | 1,331 | | | 1,291 | |
Digestive | 2,846 | | | 2,560 | | | 8,083 | | | 8,030 | |
Personal care | 309 | | | 284 | | | 854 | | | 976 | |
Weight management | 131 | | | 96 | | | 369 | | | 401 | |
| 6,076 | | | 5,423 | | | 17,430 | | | 17,438 | |
| $ | 114,615 | | | $ | 111,202 | | | $ | 336,159 | | | $ | 336,384 | |
From an individual country perspective, only the United States comprised 10 percent or more of consolidated property, plant and equipment as follows (dollar amounts in thousands):
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Property, plant and equipment: | | | |
United States | $ | 36,723 | | | $ | 41,239 | |
Other | 5,271 | | | 3,761 | |
Total property, plant and equipment, net | $ | 41,994 | | | $ | 45,000 | |
Total assets per segment is set forth below (dollar amounts in thousands):
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Assets: | | | |
Asia | $ | 110,881 | | | $ | 105,636 | |
Europe | 19,790 | | | 20,920 | |
North America | 108,298 | | | 116,052 | |
Latin America and Other | 6,364 | | | 7,165 | |
Total assets | $ | 245,333 | | | $ | 249,773 | |
(8) Income Taxes
For the three months ended September 30, 2024 and 2023, our provision for income taxes, as a percentage of income before income taxes was 41.2 percent and 35.9 percent, respectively, compared with a U.S. federal statutory rate of 21.0 percent. For the nine months ended September 30, 2024 and 2023, our provision for income taxes, as a percentage of income before income taxes was 49.2 percent and 43.6 percent, respectively, compared with a U.S. federal statutory rate of 21.0 percent.
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three and nine months ended September 30, 2024, was primarily attributed to operations in foreign countries which are treated as a branch for US tax purposes and current year foreign losses that presently do not provide future tax benefit, partially offset by foreign tax credits.
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three and nine months ended September 30, 2023, was primarily attributed to adjustments relating to operations in foreign countries which are treated as a
branch for US tax purposes as well as recording a valuation allowance against deferred tax assets which are expected to expire
before utilization.
The difference between the effective tax rate for the three and nine months ended September 30, 2024, compared to September 30, 2023, was primarily caused by a decrease in the utilization of foreign tax credits in the current period.
Our U.S. federal income tax returns for 2020 through 2022 are open to examination for federal tax purposes. We have several foreign tax jurisdictions with open tax years from 2018 through 2023.
As of September 30, 2024 and December 31, 2023, we had accrued $0.7 million and $0.3 million, respectively, related to unrecognized tax positions net of offsetting tax attributes.
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 we believe our tax estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and operating results in the period in which we make such a determination.
(9) Commitments and Contingencies
Legal Proceedings
We are a party to various legal proceedings and disputes in the United States and foreign jurisdictions. As of September 30, 2024 and December 31, 2023, accrued liabilities were $0.6 million and $0.5 million, respectively, related to the estimated outcome of these proceedings. In addition, we are a party to other litigation where there is a reasonable possibility that a loss may be incurred, but either the losses are not considered to be probable or we cannot at this time estimate the loss, if any; therefore, no provision for losses has been provided. We believe future payments related to these matters could range from $0 to approximately $0.3 million.
Management cannot predict the ultimate outcome of these matters, individually or in the aggregate, or their resulting effect on our 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 our business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. We maintain product liability, general liability and excess liability insurance coverage. However, insurance may not continue to be available at an acceptable cost to us, such coverage may not be sufficient to cover one or more large claims, or the insurers may successfully disclaim coverage as to a pending or future claim.
Non-Income Tax Contingencies
We have reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. We provide 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. We provide provisions for U.S. state sales taxes in each of the states where we have nexus. As of September 30, 2024 and December 31, 2023, accrued liabilities were $0.2 million and $0.2 million, respectively, related to non-income tax contingencies. While we believe that the assumptions and estimates used to determine contingent liabilities are reasonable, the ultimate outcome of these matters cannot presently be determined. We believe future payments related to these matters could range from $0 to approximately $3.4 million.
(10) 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 our hierarchy for our assets, measured at fair value on a recurring basis, as of September 30, 2024 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | Total |
Investment securities - trading | $ | 892 | | | $ | — | | | $ | — | | | $ | 892 | |
Total assets measured at fair value on a recurring basis | $ | 892 | | | $ | — | | | $ | — | | | $ | 892 | |
The following table presents our hierarchy for our assets, measured at fair value on a recurring basis, as of December 31, 2023 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | Total |
| | | | | | | |
| | | | | | | |
Investment securities - trading | $ | 747 | | | $ | — | | | $ | — | | | $ | 747 | |
Total assets measured at fair value on a recurring basis | $ | 747 | | | $ | — | | | $ | — | | | $ | 747 | |
Investment securities - trading — Our trading portfolio consists of various marketable securities that are valued using quoted prices in active markets.
For the nine months ended September 30, 2024 and for the year ended December 31, 2023, there were no fair value measurements using significant other observable inputs (Level 2) or significant unobservable inputs (Level 3).
The carrying amounts reflected on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. The carrying value of our debt approximates fair value due to its recent acquisition and short maturity. During the nine months ended September 30, 2024 and 2023, we did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.
(11) Revenue Recognition
Revenue Recognition
Net sales include sales of products and shipping and handling charges, net of estimates for product returns and any related sales incentives or rebates based upon historical information and current trends. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with revenue recognized at shipping point, the point in time the customer obtains control of the products. The majority of our contracts have a single performance obligation and are short term in nature. Contracts with multiple performance obligations are insignificant. Sales taxes and value-added taxes in the United States and foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Amounts received for unshipped merchandise are recorded as deferred revenue. Amounts for membership fees are deferred and amortized as revenue over the life of the membership, primarily one year.
A reserve for product returns is recorded based upon historical experience and current trends. We allow independent consultants to return the unused portion of products within ninety days of purchase if they are not satisfied with the product. In some of our markets, the requirements to return products are more restrictive.
Amounts billed to customers for shipping and handling are reported as a component of net sales.
Volume incentives and other sales incentives or rebates are a significant part of our direct sales marketing program and represent commission payments made to independent consultants. These payments are designed to provide incentives for reaching higher sales levels. The amount of volume incentive expense recognized is determined based upon the amount of qualifying purchases in a given month and recorded as volume incentive expense. Payments to independent consultants for sales incentives or rebates related to their own purchases are recorded as a reduction of revenue. Some payments for sales incentives are processed daily; while others, including rebates, are calculated monthly based upon qualifying sales.
Disaggregation of Revenue
Our products are grouped into six principal categories: general health, immune, cardiovascular, digestive, personal care and weight management. We have four business segments that are based primarily upon the geographic region where each segment operates. Each of the geographic segments operate under the Nature’s Sunshine Products and Synergy WorldWide® brands. See Note 7, Segment Information, for further information on our reportable segments and presentation of disaggregated revenue by reportable segment and product category.
Practical Expedients and Exemptions
We have made the accounting policy election to treat shipping and handling as a fulfillment activity rather than a promised service under Topic 606.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this report, as well as the consolidated financial statements, the notes thereto, and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2023, and our other reports filed since the date of such Form 10-K.
OVERVIEW
We are a natural health and wellness company primarily engaged in the manufacture and sale of nutritional and personal care products. We are a Utah corporation with our principal place of business in Lehi, Utah, and sell our products directly to customers and to a sales force of independent consultants who resell our products to consumers.
Our independent consultants market and sell our products to customers and sponsor other independent consultants who also market our products to customers. Because a significant amount of revenue is generated through the sales of our independent consultants, our revenue can be impacted by the number and productivity of our independent consultants. We seek to motivate and provide incentives to our independent consultants by offering high quality products, product support, training seminars, and financial incentives, among other considerations.
Eastern Europe
On February 24, 2022, Russian forces launched significant military action against Ukraine. There continues to be sustained conflict and disruption in the region, which is expected to endure for the foreseeable future. Our consultants in our Russia and Other market, a market within our Europe business segment that includes Russia, Ukraine, Belarus and other Common Independent States in the region, continue to operate their independent businesses, albeit at a reduced level than prior to the start of the conflict. We expect that this will continue to impact our business for the foreseeable future. We will continue monitoring the social, political, regulatory and economic environment in Ukraine and Russia, and will consider further actions as appropriate.
Net sales related to Eastern Europe for the three and nine months ended September 30, 2024 were $12.2 million and $41.1 million, respectively, compared to $12.1 million and $41.3 million for the same periods in 2023. Operating income related to Eastern Europe for the three and nine months ended September 30, 2024 was $0.5 million and $2.8 million, respectively, compared to $0.8 million and $1.6 million for the same periods in 2023. As of September 30, 2024, Eastern Europe had assets of $8.4 million net of working capital reserves related to inventories.
More broadly, there could be additional negative impacts to our net sales, earnings and cash flows should the situation escalate beyond its current scope, including, among other potential impacts, economic recessions in certain neighboring countries or globally due to inflationary pressures and supply chain cost increases or the geographic proximity of the war relative to the rest of Europe.
Inflation
Like many other companies, we are facing significant inflationary pressures in the global economy. Our operations have been, and may continue to be, adversely impacted by inflation, primarily from higher costs of raw materials, labor, production, distribution and transportation costs.
Third Quarter Performance
In the third quarter of 2024, we experienced an increase in our consolidated net sales of 3.1 percent (or 4.2 percent in local currencies) compared to the same period in 2023. Asia net sales increased approximately 5.9 percent (or 8.6 percent in local currencies) compared to the same period in 2023. Europe net sales increased approximately 4.5 percent (or 2.9 percent in local currencies) compared to the same period in 2023. North America net sales decreased approximately 3.3 percent (or 3.2 percent in local currencies) compared to the same period in 2023. Latin America and Other net sales increased approximately 12.0 percent (or 14.5 percent in local currencies) compared to the same period in 2023. The strengthening of the U.S. dollar versus the local currencies, primarily in our Asian markets, resulted in an approximate 1.1 percent, or $1.3 million, decrease of our net sales during the quarter.
Cost of sales increased $2.9 million during the three months ended September 30, 2024, compared to the same period in 2023, and as a percentage of net sales were 28.7 percent and 26.9 percent for the three months ended September 30, 2024 and 2023, respectively. The increase in cost of sales percentage is primarily due to higher inflation and unfavorable foreign exchange which offset our savings initiatives.
In absolute terms, selling, general and administrative expenses decreased $0.3 million during the three months ended September 30, 2024, compared to the same period in 2023, and as a percentage of net sales were 35.7 percent and 37.1 percent for the three months ended September 30, 2024 and 2023, respectively. The decrease was primarily related to the streamlining of our global overhead expenses and reduced service fees due to China's lower net sales.
As an international business, we have significant sales and costs denominated in currencies other than the U.S. Dollar. We expect foreign markets with functional currencies other than the U.S. Dollar will continue to represent a substantial portion of our overall sales and related operating expenses. Accordingly, changes in foreign currency exchange rates could materially affect sales and costs or the comparability of sales and costs from period to period as a result of translating foreign markets' financial statements into our reporting currency.
RESULTS OF OPERATIONS
The following table summarizes our unaudited consolidated operating results from continuing operations in U.S. dollars and as a percentage of net sales for the three months ended September 30, 2024 and 2023 (dollar amounts in thousands):
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| Three Months Ended September 30, 2024 | | Three Months Ended September 30, 2023 | | Change |
| Total dollars | | Percent of net sales | | Total dollars | | Percent of net sales | | Total dollars | | Percentage |
Net sales | $ | 114,615 | | | 100.0 | % | | $ | 111,202 | | | 100.0 | % | | $ | 3,413 | | | 3.1 | % |
Cost of sales | 32,856 | | | 28.7 | | | 29,964 | | | 26.9 | | | 2,892 | | | 9.7 | |
Gross profit | 81,759 | | | 71.3 | | | 81,238 | | | 73.1 | | | 521 | | | 0.6 | |
Volume incentives | 35,521 | | | 31.0 | | | 34,118 | | | 30.7 | | | 1,403 | | | 4.1 | |
SG&A expenses | 40,954 | | | 35.7 | | | 41,288 | | | 37.1 | | | (334) | | | (0.8) | |
Operating income | 5,284 | | | 4.6 | | | 5,832 | | | 5.2 | | | (548) | | | (9.4) | |
Other income (loss), net | 2,615 | | | 2.3 | | | (927) | | | (0.8) | | | 3,542 | | | 382.1 | |
Income before income taxes | 7,899 | | | 6.9 | | | 4,905 | | | 4.4 | | | 2,994 | | | 61.0 | |
Provision for income taxes | 3,253 | | | 2.8 | | | 1,763 | | | 1.6 | | | 1,490 | | | 84.5 | |
Net income | $ | 4,646 | | | 4.1 | % | | $ | 3,142 | | | 2.8 | % | | $ | 1,504 | | | 47.9 | % |
The following table summarizes our unaudited consolidated operating results from continuing operations in U.S. dollars and as a percentage of net sales for the nine months ended September 30, 2024 and 2023 (dollar amounts in thousands):
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| Nine Months Ended September 30, 2024 | | Nine Months Ended September 30, 2023 | | Change |
| Total dollars | | Percent of net sales | | Total dollars | | Percent of net sales | | Total dollars | | Percentage |
Net sales | $ | 336,159 | | | 100.0 | % | | $ | 336,384 | | | 100.0 | % | | $ | (225) | | | (0.1) | % |
Cost of sales | 96,535 | | | 28.7 | | | 93,580 | | | 27.8 | | | 2,955 | | | 3.2 | |
Gross profit | 239,624 | | | 71.3 | | | 242,804 | | | 72.2 | | | (3,180) | | | (1.3) | |
Volume incentives | 103,784 | | | 30.9 | | | 102,560 | | | 30.5 | | | 1,224 | | | 1.2 | |
SG&A expenses | 120,295 | | | 35.8 | | | 127,203 | | | 37.8 | | | (6,908) | | | (5.4) | |
Operating income | 15,545 | | | 4.6 | | | 13,041 | | | 3.9 | | | 2,504 | | | 19.2 | |
Other income (loss), net | 1,432 | | | 0.4 | | | (500) | | | (0.1) | | | 1,932 | | | 386.4 | |
Income before income taxes | 16,977 | | | 5.1 | | | 12,541 | | | 3.7 | | | 4,436 | | | 35.4 | |
Provision for income taxes | 8,353 | | | 2.5 | | | 5,469 | | | 1.6 | | | 2,884 | | | 52.7 | |
Net income | $ | 8,624 | | | 2.6 | % | | $ | 7,072 | | | 2.1 | % | | $ | 1,552 | | | 21.9 | % |
Net Sales
International operations have provided, and are expected to continue to provide, a significant portion of our total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we present net sales excluding the impact of foreign exchange fluctuations. We compare the percentage change in net sales from one period to another period by excluding the effects of foreign currency exchange as shown below. Net sales excluding the impact of foreign exchange fluctuations is not a U.S. GAAP financial measure and removes from net sales in U.S. dollars the impact of changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period. We believe presenting the impact of foreign currency fluctuations is useful to investors because it allows a more meaningful comparison of net sales of our foreign operations from period to period. However, net sales excluding the impact of foreign currency fluctuations should not be considered in isolation or as an alternative to net sales in U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. See Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The following table summarizes the changes in net sales by operating segment with a reconciliation to net sales excluding the impact of currency fluctuations for the three months ended September 30, 2024 and 2023 (dollar amounts in thousands):
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| Net Sales by Operating Segment |
| Three Months Ended September 30, 2024 | | Three Months Ended September 30, 2023 | | Percent Change | | Impact of Currency Exchange | | Percent Change Excluding Impact of Currency |
Asia | $ | 55,293 | | | $ | 52,218 | | | 5.9 | % | | $ | (1,418) | | | 8.6 | % |
Europe | 19,615 | | | 18,769 | | | 4.5 | | | 302 | | | 2.9 | |
North America | 33,631 | | | 34,792 | | | (3.3) | | | (46) | | | (3.2) | |
Latin America and Other | 6,076 | | | 5,423 | | | 12.0 | | | (136) | | | 14.5 | |
| $ | 114,615 | | | $ | 111,202 | | | 3.1 | % | | $ | (1,298) | | | 4.2 | % |
The following table summarizes the changes in net sales by operating segment with a reconciliation to net sales excluding the impact of currency fluctuations for the nine months ended September 30, 2024 and 2023 (dollar amounts in thousands):
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| Net Sales by Operating Segment |
| Nine Months Ended September 30, 2024 | | Nine Months Ended September 30, 2023 | | Percent Change | | Impact of Currency Exchange | | Percent Change Excluding Impact of Currency |
Asia | $ | 151,497 | | | $ | 153,438 | | | (1.3) | % | | $ | (7,079) | | | 3.3 | % |
Europe | 63,513 | | | 61,410 | | | 3.4 | | | 978 | | | 1.8 | |
North America | 103,719 | | | 104,098 | | | (0.4) | | | (87) | | | (0.3) | |
Latin America and Other | 17,430 | | | 17,438 | | | — | | | 140 | | | (0.8) | |
| $ | 336,159 | | | $ | 336,384 | | | (0.1) | % | | $ | (6,048) | | | 1.7 | % |
Consolidated net sales for the three and nine months ended September 30, 2024 were $114.6 million and $336.2 million, respectively, compared to $111.2 million and $336.4 million for the same period in 2023, which represents an increase of 3.1 percent and a decrease of 0.1 percent, respectively. The increase for the three months ended September 30, 2024 was primarily related to product sales increases in our Asia and Europe operating segments. Excluding the impact of foreign currency exchange rate fluctuations, consolidated net sales for the three and nine months ended September 30, 2024 increased 4.2 percent and 1.7 percent, respectively, from the same periods in 2023.
Asia
Net sales related to Asia for the three and nine months ended September 30, 2024 were $55.3 million and $151.5 million, respectively, compared to $52.2 million and $153.4 million for the same periods in 2023, or an increase of 5.9 percent and a decrease of 1.3 percent, respectively. In local currency, net sales for the three and nine months ended September 30, 2024 increased 8.6 percent and 3.3 percent, respectively, compared to the same periods in 2023.
Notable activity in the following markets contributed to the results of Asia:
In our Taiwan market, net sales increased $2.8 million and $4.7 million, or 17.9 percent and 10.2 percent, for the three and nine months ended September 30, 2024, compared to the same periods in 2023. In local currencies, net sales for the three and nine months ended September 30, 2024 increased 20.4 percent and 14.1 percent, compared to the same periods in 2023. We attribute the growth in net sales primarily to effective execution of fundamentals to improve consultant activity.
In our South Korea market, net sales decreased $27,000 and $29,000, or 0.2 percent and 0.1 percent, for the three and nine months ended September 30, 2024, compared to the same periods in 2023. In local currency, net sales for the three and nine months ended September 30, 2024 increased 3.1 percent and 3.8 percent, respectively, compared to the same periods in 2023. Net sales continued to show a modest improvement in local currency due to improved customer acquisition.
In our Japan market, net sales increased $2.9 million and $0.7 million, or 28.1 percent and 2.3 percent, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. In local currencies, net sales for the three and nine months ended September 30, 2024 increased 34.4 percent and 12.1 percent, respectively, compared to the same periods in 2023. The increase in net sales was primarily the result of strong customer acquisition that was bolstered by higher average order values.
In our China market, net sales decreased $2.4 million and $7.2 million, or 22.3 percent and 21.9 percent, for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. In local currencies, net sales for the three and nine months ended September 30, 2024 decreased 23.0 percent and 20.4 percent, respectively, compared to the same periods in 2023. The decrease in net sales was primarily the result of challenging macroeconomic factors.
Europe
Net sales related to Europe for the three and nine months ended September 30, 2024 were $19.6 million and $63.5 million, respectively, compared to $18.8 million and $61.4 million for the same periods in 2023, or increases of 4.5 percent and 3.4 percent, respectively. In local currency, net sales for the three and nine months ended September 30, 2024 increased 2.9 percent and 1.8 percent, respectively, compared to the same periods in 2023. The functional currency for many of these markets is the U.S. Dollar which reduces the effect from foreign currency fluctuations. Fluctuations in foreign currency exchange rates had favorable impacts on net sales of $0.3 million and $1.0 million for the three and nine months ended September 30, 2024, respectively. We attribute the increase in net sales in local currency primarily due to the increased focus on our field activation initiatives.
North America
Net sales related to North America for the three and nine months ended September 30, 2024 were $33.6 million and $103.7 million, respectively, compared to $34.8 million and $104.1 million for the same periods in 2023, or decreases of 3.3 percent and 0.4 percent, respectively. In local currency, net sales for the three and nine months ended September 30, 2024 decreased 3.2 percent and 0.3 percent, respectively, compared to the same periods in 2023.
In the United States, net sales for the three and nine months ended September 30, 2024 decreased $0.9 million and $0.4 million, or 2.8 percent and 0.4 percent, respectively, compared to the same periods in 2023. The decrease was primarily due to lower customer acquisition resulting from the near-term impact of the launch of our new digital platform.