10-Q 1 a12-20036_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2012

 

OR

 

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

 

For the transition period from                       to                    .

 

Commission File Number:  0-8707

 

 

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

Utah

 

87-0327982

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

2500 West Executive Parkway, Suite 100

Lehi, Utah 84043

(Address of principal executive offices and zip code)

 

(801) 341-7900

(Registrant’s telephone number including area code)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares of Common Stock, no par value, outstanding on October 31, 2012 was 15,763,560 shares.

 

 

 



Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended September 30, 2012

 

Table of Contents

 

Part I. Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Comprehensive Income

4

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

 

 

Item 1A.

Risk Factors

35

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

35

 

 

 

 

 

Item 4.

Mine Safety Disclosures

35

 

 

 

 

 

Item 5.

Other Information

35

 

 

 

 

 

Item 6.

Exhibits

36

 

2



Table of Contents

 

PART I FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

 

 

 

September 30,
2012

 

December 31,
2011

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

72,543

 

$

58,969

 

Accounts receivable, net of allowance for doubtful accounts of $607 and $647, respectively

 

10,003

 

9,868

 

Investments available for sale

 

2,192

 

5,677

 

Inventories

 

43,655

 

41,611

 

Deferred income tax assets

 

4,668

 

4,395

 

Prepaid expenses and other

 

5,946

 

4,583

 

Total current assets

 

139,007

 

125,103

 

 

 

 

 

 

 

Property, plant and equipment, net

 

27,975

 

25,137

 

Investment securities

 

1,317

 

1,429

 

Intangible assets, net

 

1,040

 

1,151

 

Deferred income tax assets

 

16,610

 

16,576

 

Other assets

 

6,619

 

6,415

 

 

 

$

192,568

 

$

175,811

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

5,710

 

$

5,980

 

Accrued volume incentives

 

19,802

 

19,326

 

Accrued liabilities

 

27,224

 

27,938

 

Deferred revenue

 

3,005

 

2,603

 

Current installments of long-term debt

 

3,334

 

3,296

 

Income taxes payable

 

4,468

 

8,655

 

Total current liabilities

 

63,543

 

67,798

 

 

 

 

 

 

 

Liability related to unrecognized tax benefits

 

9,772

 

10,426

 

Long-term debt

 

3,392

 

5,894

 

Deferred compensation payable

 

1,317

 

1,429

 

Other liabilities

 

2,696

 

2,826

 

Total long-term liabilities

 

17,177

 

20,575

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Common stock, no par value; 50,000 shares authorized, 15,761 and 15,569 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively

 

75,612

 

71,628

 

Retained earnings

 

45,203

 

25,879

 

Accumulated other comprehensive loss

 

(8,967

)

(10,069

)

Total shareholders’ equity

 

111,848

 

87,438

 

 

 

$

192,568

 

$

175,811

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net sales revenue (net of the rebate portion of volume incentives of $10,460 and $10,877, respectively)

 

$

91,232

 

$

91,102

 

Cost and expenses:

 

 

 

 

 

Cost of goods sold

 

17,713

 

16,879

 

Volume incentives

 

33,155

 

32,733

 

Selling, general and administrative

 

31,659

 

31,845

 

Contract termination costs

 

 

14,750

 

 

 

82,527

 

96,207

 

Operating income (loss)

 

8,705

 

(5,105

)

Other income (expense), net

 

(214

)

1,204

 

Income (loss) before provision for income taxes

 

8,491

 

(3,901

)

Provision (benefit) for income taxes

 

2,121

 

(1,645

)

Net income (loss)

 

$

6,370

 

$

(2,256

)

 

 

 

 

 

 

Basic and diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Net income (loss) per common share

 

$

0.41

 

$

(0.14

)

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Net income (loss) per common share

 

$

0.40

 

$

(0.14

)

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

15,628

 

15,562

 

Weighted average diluted common shares outstanding

 

15,971

 

15,562

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.05

 

$

 

 

See accompanying notes to the unaudited 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,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income (loss)

 

$

6,370

 

$

(2,256

)

Foreign currency translation gain (loss) (net of tax)

 

1,416

 

(1,734

)

Net unrealized gains (losses) on investment securities (net of tax)

 

20

 

(40

)

Total comprehensive income (loss)

 

$

7,806

 

$

(4,030

)

 

See accompanying notes to the unaudited 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,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net sales revenue (net of the rebate portion of volume incentives of $32,746 and $33,815, respectively)

 

$

277,091

 

$

275,757

 

Cost and expenses:

 

 

 

 

 

Cost of goods sold

 

53,159

 

52,560

 

Volume incentives

 

100,276

 

100,421

 

Selling, general and administrative

 

95,466

 

97,458

 

Contract termination costs

 

 

14,750

 

 

 

248,901

 

265,189

 

Operating income

 

28,190

 

10,568

 

Other income (expense), net

 

(159

)

1,049

 

Income before provision for income taxes

 

28,031

 

11,617

 

Provision for income taxes

 

7,147

 

1,637

 

Net income

 

20,884

 

9,980

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

Net income per common share

 

$

1.34

 

$

0.64

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Net income per common share

 

$

1.31

 

$

0.64

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

15,603

 

15,544

 

Weighted average diluted common shares outstanding

 

15,917

 

15,674

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.10

 

$

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

20,884

 

$

9,980

 

Foreign currency translation gain (loss) (net of tax)

 

1,061

 

(249

)

Net unrealized gains (loss) on investment securities (net of tax)

 

41

 

(18

)

Total comprehensive income

 

$

21,986

 

$

9,713

 

 

See accompanying notes to the unaudited 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,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

20,884

 

$

9,980

 

Adjustments to reconcile net income to net cash provided by (used in) by operating activities:

 

 

 

 

 

Provision for doubtful accounts

 

39

 

(101

)

Depreciation and amortization

 

3,028

 

3,204

 

Share-based compensation expense

 

2,001

 

1,917

 

Loss on sale of property and equipment

 

23

 

14

 

Deferred income taxes

 

(307

)

(4,419

)

Amortization of bond discount

 

3

 

13

 

Purchase of trading investment securities

 

(60

)

(59

)

Proceeds from sale of trading investment securities

 

268

 

338

 

Realized and unrealized (gains) losses on investments

 

(63

)

25

 

Foreign exchange losses

 

856

 

106

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(429

)

(5,691

)

Inventories

 

(1,926

)

(2,313

)

Prepaid expenses and other current assets

 

(1,021

)

607

 

Other assets

 

(148

)

(2,155

)

Accounts payable

 

(361

)

428

 

Accrued volume incentives

 

386

 

1,224

 

Accrued liabilities

 

(1,264

)

(4,554

)

Deferred revenue

 

403

 

(343

)

Income taxes payable

 

(4,222

)

848

 

Liability related to unrecognized tax benefits

 

(654

)

(2,834

)

Deferred compensation payable

 

(112

)

(355

)

Net cash provided by (used in) operating activities

 

17,324

 

(4,120

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property, plant and equipment

 

(5,617

)

(1,117

)

Proceeds from sale of property, plant and equipment

 

25

 

 

Proceeds from maturity and sale of investments available for sale

 

3,689

 

5,650

 

Purchase of investments available for sale

 

(197

)

(3,867

)

Net cash provided by (used in) investing activities

 

(2,100

)

666

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from the issuance of long-term debt

 

 

10,000

 

Principal payments of long-term debt

 

(2,465

)

 

Dividends paid

 

(1,560

)

 

Proceeds from the exercise of stock options

 

1,982

 

372

 

Net cash provided by (used in) financing activities

 

(2,043

)

10,372

 

Effect of exchange rates on cash and cash equivalents

 

393

 

(419

)

Net increase in cash and cash equivalents

 

13,574

 

6,499

 

Cash and cash equivalents at the beginning of the period

 

58,969

 

47,604

 

Cash and cash equivalents at the end of the period

 

$

72,543

 

$

54,103

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for income taxes

 

$

12,694

 

$

7,851

 

Cash paid for interest

 

97

 

 

 

See accompanying notes to the unaudited 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, Distributors and customers who use the products themselves or resell them to other Distributors or customers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of 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, Indonesia, Ireland, Japan, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Moldova, Mongolia, the Netherlands, Nicaragua, Norway, Panama, Peru, the Philippines, Poland, Russia, Singapore, South Korea, Spain, Sweden, Taiwan, Thailand, the Ukraine, the United Kingdom, the United States, Venezuela and Vietnam. The Company also exports its products to several other countries, including Argentina, Australia, Chile, Israel and New Zealand.

 

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, 2012, and for the three month and nine month periods ended September 30, 2012 and 2011.  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, 2012.

 

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, 2011.

 

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

 

As of June 30, 2012, Belarus was designated as a highly inflationary economy. Historically, the U.S. dollar has been our 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 our Distributors in this market has become diminished. During the three and nine months ended September 30, 2012, the Company’s Belarusian subsidiary’s net sales revenue represented approximately 1.6 percent and 1.5 percent of consolidated net sales revenue, respectively. The Company’s total and net assets related to Belarus as of September 30, 2012 and December 31, 2011 were insignificant.

 

Contract Termination Costs

 

In 1999 and 2000, the Company and NutriPlus LLC (“NutriPlus”) entered into an Asset Purchase Agreement and subsequent Settlement Agreement (together the “Purchase Agreement”) under which the Company acquired certain assets in order to establish its Russian business, and NutriPlus acquired rights to receive certain royalty payments from the Company expressed as a percentage of the Company’s net sales in its Russian business.

 

On July 8, 2011, the Company and NutriPlus entered into a settlement agreement, in which the Company agreed to pay NutriPlus $21,700 for the release of all past and future royalty obligations.  Of the $21,700, the Company applied $6,950 toward previously accrued and expensed but unpaid royalties, and $14,750 in exchange for the contract termination and extinguishment of future royalty obligations.

 

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(2)                     Inventories

 

Inventories consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Raw Materials

 

$

13,814

 

$

12,992

 

Work in Progress

 

931

 

1,230

 

Finished Goods

 

28,910

 

27,389

 

 

 

$

43,655

 

$

41,611

 

 

(3)                     Intangible Assets

 

At September 30, 2012 and December 31, 2011, intangibles for product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $723 and $612, and a net amount of $1,040 and $1,151, 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, 2012 and 2011 was $37 and $37, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2012 and 2011 was $111 and $111, respectively. Estimated amortization expense for each of the next five fiscal years is $149.

 

(4)                     Investments

 

The amortized cost and estimated fair values of available-for-sale securities by investment category are as follows:

 

As of September 30, 2012

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

709

 

$

36

 

$

 

$

745

 

U.S. government securities funds

 

990

 

 

(4

)

986

 

Equity securities

 

227

 

240

 

(6

)

461

 

Total short-term investment securities

 

$

1,926

 

$

276

 

$

(10

)

$

2,192

 

 

As of December 31, 2011

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Municipal obligations

 

$

1,158

 

$

51

 

$

 

$

1,209

 

U.S. government securities funds

 

988

 

 

(5

)

983

 

Short-term deposits

 

3,104

 

 

 

3,104

 

Equity securities

 

227

 

159

 

(5

)

381

 

Total short-term investment securities

 

$

5,477

 

$

210

 

$

(10

)

$

5,677

 

 

The municipal obligations held at a fair value of $745 at September 30, 2012 all mature in less than three years.

 

During the nine month periods ended September 30, 2012 and 2011, the proceeds from the maturities and sales of available-for-sale securities were $3,689 and $5,650, respectively. There were no gross realized gains (losses) on sales of available-for-sale securities (net of tax) for the nine month periods ended September 30, 2012 and 2011, respectively.

 

The Company’s trading securities portfolio totaled $1,317 at September 30, 2012 and $1,429 at December 31, 2011, and generated gains of $44 and losses of $121 for the three months ended September 30, 2012 and 2011, respectively and generated gains of $104 and losses of $46 for the nine months ended September 30, 2012 and 2011, respectively.

 

As of September 30, 2012 and December 31, 2011, the Company had unrealized losses of $4 and $5, respectively, in its U.S. government securities funds. These losses are due to the interest rate sensitivity of the U.S. government securities funds.

 

(5)                     Long-Term Debt

 

On August 9, 2011, the Company entered into a Revolving Credit Agreement with Wells Fargo Bank, N. A., that permits the Company to borrow up to $15,000 through August 9, 2013, bearing interest at LIBOR plus 1.25 percent. The Company must pay an

 

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annual commitment fee of 0.25 percent on the unused portion of the commitment. At September 30, 2012 and December 31, 2011, the Company had $15,000 available under this facility.

 

A term loan of $10,000 was obtained in conjunction with the Revolving Credit Agreement with Wells Fargo Bank, N. A., and has a maturity date of August 9, 2014, a variable interest rate of LIBOR plus 1.25 percent (1.50 percent as of September 30, 2012) and monthly amortization of principal. The term loan is collateralized by the Company’s manufacturing facility in Spanish Fork, Utah.

 

Long-term debt at September 30, 2012 and December 31, 2011 consists of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Term loan due in monthly installments of approximately $285, including interest, secured by real estate

 

$

6,726

 

$

9,190

 

Less current installments

 

(3,334

)

(3,296

)

Long-term debt

 

$

3,392

 

$

5,894

 

 

The Revolving Credit Agreement contains restrictions on liquidity, leverage levels, minimum net income and consecutive quarterly net losses. In addition, the agreements restrict capital expenditures, lease expenditures, other indebtedness, liens on assets, guaranties, loans and advances, and the merger, consolidation and transfer of assets except in the ordinary course of business.  The Company is currently in compliance with these debt covenants.

 

(6)                     Net Income Per Share

 

Basic net income per common share (“Basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share.

 

The 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, 2012 and 2011:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income (loss)

 

$

6,370

 

$

(2,256

)

$

20,884

 

$

9,980

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

15,628

 

15,562

 

15,603

 

15,544

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

$

0.41

 

$

(0.14

)

$

1.34

 

$

0.64

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

15,628

 

15,562

 

15,603

 

15,544

 

Weighted average stock grants outstanding

 

343

 

 

314

 

130

 

Diluted weighted average shares outstanding

 

15,971

 

15,562

 

15,917

 

15,674

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

$

0.40

 

$

(0.14

)

$

1.31

 

$

0.64

 

 

 

 

 

 

 

 

 

 

 

Potentially dilutive shares excluded from diluted per share amounts:

 

 

 

 

 

 

 

 

 

Stock options

 

96

 

 

96

 

661

 

 

 

 

 

 

 

 

 

 

 

Potentially anti-dilutive shares excluded from diluted per share amounts:

 

 

 

 

 

 

 

 

 

Stock options

 

167

 

1,379

 

249

 

202

 

 

Potentially dilutive shares excluded from diluted per share amounts include performance-based options to purchase shares of common stock which will not vest until certain earnings metrics have been achieved. Potentially anti-dilutive shares excluded from diluted per share amounts include both time-based stock options and unearned performance-based options to purchase shares of

 

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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 dilutive net income per share for the three and nine months ended September 30, 2012 and 2011.

 

(7)                     Capital Transactions

 

Dividends

 

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

 

On May 7, 2012, the Company announced that its Board of Directors approved a cash dividend of $0.05 per common share in an aggregate amount of $780 that was paid on May 29, 2012 to shareholders of record on May 18, 2012. On August 1, 2012, the Company announced that its Board of Directors approved a cash dividend of $0.05 per common share in an aggregate amount of $780 that was paid on August 23, 2012 to shareholders of record on August 13, 2012.

 

Share-based Compensation

 

During the nine-month period ended September 30, 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 authorized for the granting of awards under the 2012 Incentive Plan. 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.

 

The Company also maintained a stock option plan, which was approved by shareholders in 1995 and expired in 2005 (“the 1995 Stock Plan”). The 1995 Stock Plan provided for the granting or awarding of certain nonqualified stock options to officers, directors and other employees. The term, not to exceed 10 years, and the vesting and exercise period of each stock option awarded under the 1995 Stock Plan were determined by the Company’s Board of Directors.

 

Stock option activity for the nine months ended September 30, 2012 is as follows:

 

 

 

Number of
Shares

 

Weighted Average
Exercise
Price Per Share

 

Options outstanding at December 31, 2011

 

1,374

 

$

9.88

 

Granted

 

681

 

15.11

 

Expired

 

(6

)

8.59

 

Exercised

 

(191

)

10.34

 

Options outstanding at September 30, 2012

 

1,858

 

11.75

 

 

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 vest 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, and 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.

 

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During the nine-month period ended September 30, 2012, the Company issued time-based options to purchase 217 shares of common stock under the 2009 Incentive Plan to the Company’s new senior executives. These options were issued with a weighted average exercise price of $15.65 per share and a weighted average grant date fair value of $7.66 per share. All of the options issued have an option termination date of ten years from the option grant date.

 

Also, during the nine-month period ended September 30, 2012, the Company issued options to purchase 464 shares of common stock under the 2012 Incentive Plan to the Company’s executive officers and other employees, which are composed of both time-based stock options and net sales revenue performance-based stock options. These options were issued with a weighted average exercise price of $14.86 per share and a weighted average grant date fair value of $7.01 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, 2012:

 

 

 

2012

 

Expected life (in years)

 

4.0 to 6.0

 

Risk-free interest rate

 

0.3 to 0.9

 

Expected volatility

 

58.5 to 66.0

 

Dividend yield

 

0.0 to 1.3

 

 

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 obligation rate that corresponds with the option life.

 

Share-based compensation expense from time-based stock options for the three-month periods ended September 30, 2012 and 2011 was approximately $630 and $166, respectively; the related tax benefit was approximately $246 and $66, respectively. Share-based compensation expense from time-based stock options for the nine-month periods ended September 30, 2012 and 2011 was approximately $1,299 and $390, respectively; the related tax benefit was approximately $513 and $156, respectively. As of September 30, 2012 and December 31, 2011, the unrecognized share-based compensation expense related to the grants described above was $3,285 and $607, respectively. As of September 30, 2012, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 1.9 years.

 

Share-based compensation expense from operating income performance-based stock options for the three-month periods ended September 30, 2012 and 2011was approximately $0 and $607, respectively; the related tax benefit was approximately $0 and $240, respectively. Shared-based compensation expense from operating income performance-based stock options for the nine-month periods ended September 30, 2012 and 2011was approximately $652 and $1,527, respectively; the related tax benefit was approximately $255 and $603, respectively. As of September 30, 2012 and December 31, 2011, the unrecognized share-based compensation expense related to these options was approximately $0 and $652, respectively. As of September 30, 2012, there is no remaining compensation expense to be recognized for the operating income performance-based stock options.

 

The Company has not recognized any share-based compensation expense related to the net sales revenue performance-based stock options for the three and nine-month periods ended September 30, 2012.  Should the Company attain all of the net sales revenue metrics related to the net sales revenue performance-based stock option grants, the Company could recognize up to $700 of potential share-based compensation expense.

 

At September 30, 2012, the aggregate intrinsic value of all outstanding stock options to purchase 1,858 shares of common stock, exercisable stock options to purchase 1,061 shares of common stock and stock options to purchase 660 shares of common stock that are expected to vest (net of expected forfeitures) was $8,367, $7,213 and $1,085, respectively. At December 31, 2011, the aggregate intrinsic value of outstanding options to purchase 1,374 shares of common stock, the exercisable options to purchase 772 shares of common stock, and options to purchase 602 shares of common stock expected to vest (net of expected forfeitures) was $7,757, $4,819 and $2,732, respectively.

 

Restricted stock unit activity for the nine months ended September 30, 2012 is as follows:

 

 

 

Number of
Shares

 

Weighted Average
Grant Date
Fair Value

 

Units outstanding at December 31, 2011

 

 

$

 

Granted

 

18

 

12.07

 

Vested

 

 

 

Forfeited

 

 

 

Units outstanding at September 30, 2012

 

18

 

12.07

 

 

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Table of Contents

 

During the nine-month period ended September 30, 2012, the Company issued 18 restricted stock units (RSUs) of common stock under the 2012 Incentive Plan to the Board of Directors. The RSUs were issued with a weighted average grant date fair value of $12.07 per share and vest over a one year period from the grant date.

 

RSUs are valued at the market value on the date of grant.  Due to 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.

 

Share-based compensation expense from RSUs for the three and nine-month periods ended September 30, 2012 was approximately $50 and the related tax benefit was approximately $20. As of September 30, 2012, the unrecognized share-based compensation expense related to the grants described above was $173. As of September 30, 2012, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 0.7 years.

 

(8)                     Segment Information

 

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

 

The Company has two business segments that operate under the Nature’s Sunshine Products brand and are divided based on their geographic operations in the United States (NSP United States) and in countries outside the United States (NSP International). The Company’s third business segment operates under the Synergy WorldWide brand, which distributes its products through different marketing and distributor compensation plans and products with formulations that are sufficiently different from those of NSP United States and NSP International to warrant accounting for these operations as a separate business segment. Net sales revenues and operating income (loss) 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.

 

Reportable business segment information is as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales revenue:

 

 

 

 

 

 

 

 

 

Nature’s Sunshine Products:

 

 

 

 

 

 

 

 

 

United States

 

$

33,695

 

$

33,519

 

$

104,053

 

$

105,061

 

International

 

31,275

 

33,059

 

97,187

 

102,661

 

 

 

64,970

 

66,578

 

201,240

 

207,722

 

Synergy WorldWide

 

26,262

 

24,524

 

75,851

 

68,035

 

Total net sales revenue

 

91,232

 

91,102

 

277,091

 

275,757

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Nature’s Sunshine Products:

 

 

 

 

 

 

 

 

 

United States

 

31,001

 

31,176

 

94,230

 

95,257

 

International

 

27,826

 

43,151

 

85,860

 

108,852

 

 

 

58,827

 

74,327

 

180,090

 

204,109

 

Synergy WorldWide

 

23,700

 

21,880

 

68,811

 

61,080

 

Total operating expenses

 

82,527

 

96,207

 

248,901

 

265,189

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

Nature’s Sunshine Products:

 

 

 

 

 

 

 

 

 

United States

 

2,694

 

2,343

 

9,823

 

9,804

 

International

 

3,449

 

(10,092

)

11,327

 

(6,191

)

 

 

6,143

 

(7,749

)

21,150

 

3,613

 

Synergy WorldWide

 

2,562

 

2,644

 

7,040

 

6,955

 

Total operating income (loss)

 

8,705

 

(5,105

)

28,190

 

10,568

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

(214

)

1,204

 

(159

)

1,049

 

Income (loss) before provision for income taxes

 

$

8,491

 

$

(3,901

)

$

28,031

 

$

11,617

 

 

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Table of Contents

 

NSP International’s operating loss of $10,092 and $6,191 for the three and nine months ended September 30, 2011, includes $14,750 of contract termination costs related to the Company’s arbitration settlement with NutriPlus LLC (described further in Note 1, Basis of Presentation).

 

From an individual country perspective, only the United States comprises 10 percent or more of consolidated net sales revenue for the three and nine-month periods ended September 30, 2012 and 2011 as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales revenue:

 

 

 

 

 

 

 

 

 

United States

 

$

38,243

 

$

38,885

 

$

118,390

 

$

120,868

 

Other

 

52,989

 

52,217

 

158,701

 

154,889

 

 

 

$

91,232

 

$

91,102

 

$

277,091

 

$

275,757

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

NSP United States:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

17,809

 

$

17,441

 

$

56,010

 

$

55,344

 

Vitamin, mineral and other nutritional supplements

 

14,296

 

14,280

 

43,061

 

43,204

 

Personal care products

 

970

 

1,011

 

2,976

 

3,328

 

Other products

 

620

 

787

 

2,006

 

3,185

 

 

 

33,695

 

33,519

 

104,053

 

105,061

 

NSP International:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

16,913

 

$

18,502

 

$

52,188

 

$

56,244

 

Vitamin, mineral and other nutritional supplements

 

12,037

 

12,053

 

37,191

 

37,631

 

Personal care products

 

1,944

 

2,128

 

6,660

 

7,473

 

Other products

 

381

 

376

 

1,148

 

1,313

 

 

 

31,275

 

33,059

 

97,187

 

102,661

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

10,005

 

$

9,797

 

$

29,982

 

$

27,428

 

Vitamin, mineral and other nutritional supplements

 

14,510

 

12,699

 

40,575

 

34,668

 

Personal care products

 

1,394

 

1,378

 

4,020

 

4,230

 

Other products

 

353

 

650

 

1,274

 

1,709

 

 

 

26,262

 

24,524

 

75,851

 

68,035

 

 

 

$

91,232

 

$

91,102

 

$

277,091

 

$

275,757

 

 

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

 

 

 

September 30,
2012

 

December 31,
2011

 

Property, plant and equipment:

 

 

 

 

 

United States

 

$

20,951

 

$

18,119

 

Venezuela

 

3,636

 

3,939

 

Other

 

3,388

 

3,079

 

Total property, plant and equipment

 

$

27,975

 

$

25,137

 

 

13



Table of Contents

 

(9)       Income Taxes

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the periods in which they occur. For the three months ended September 30, 2012 and 2011, the Company’s provision (benefit) for income taxes, as a percentage of income (loss) before income taxes was 25.0 percent and (42.2) percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.  For the nine months ended September 30, 2012 and 2011, the Company’s provision for income taxes, as a percentage of income before income taxes was 25.5 percent and 14.1 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.8 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.2 percent).

 

The difference between the effective tax rate and the U.S. federal statutory rate for the three months ended September 30, 2011 was primarily attributed to the pretax loss related to contract termination costs, in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and a favorable inflation adjustment related to Venezuela (-3.9 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.5 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.0 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2011 was primarily attributed to contract termination costs (-9.5 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and a favorable inflation adjustment related to Venezuela (-11.5 percent).

 

The Company’s U.S. federal income tax returns for 2003 through 2005, and 2009 through 2011 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2004 through 2011. The Internal Revenue Service (“IRS”) is currently conducting an audit of the Company’s U.S. federal income tax returns for the 2009 and 2010 tax years.

 

In October 2009, the IRS issued an examination report formally proposing adjustments with respect to the 2003 through 2005 taxable years, which primarily related to the prices that were charged in intra-group transfers of property and the disallowance of related deductions. The Company challenged the IRS proposals, and took the matter before the Office of Appeals of the Internal Revenue Service.  A settlement was reached with IRS Appeals and a proposed settlement agreement was signed by NSP in January 2012. As of September 30, 2012, the Company has made all required payments related to this matter and, absent further comment from the IRS, the examination period for the 2003 through 2005 taxable years will close on December 31, 2012.

 

During 2011, the IRS issued an examination report formally proposing adjustments with respect to the 2006 through 2008 taxable years.  As with the previous examination cycle discussed above, the adjustments related primarily to the prices that were charged in intra-group transfers of property and the disallowance of related deductions.  The Company reached a settlement of the issues with the IRS examination team and an agreement was signed by the Company in January 2012.  On March 7, 2012, the Company received a letter from the IRS examination team stating that they accepted the examination report and do not plan to make additional changes. The Company has made all required payments related to this matter and the examination period for the 2006 through 2008 taxable years are now closed.

 

As of September 30, 2012, the Company had accrued $9,772 related to unrecognized tax positions compared with $10,426 as of December 31, 2011. This net decrease was primarily attributed to the expiration of the statute of limitations on certain liabilities in various foreign jurisdictions.

 

Changes to the effective rate due to dividends received from foreign subsidiaries, impact of foreign tax credits and the unremitted earnings calculation are expected to be recurring; however, depending on various factors, the changes may be favorable or unfavorable in a particular period. The Company’s aggregate consolidated effective tax rate will typically reflect differences between the lower statutory rates in foreign markets compared to the U.S. statutory rate of 35 percent. Given the large number of jurisdictions in which the Company does business and the number of factors that can impact effective tax rates in any given year, the consolidated effective rate is likely to reflect relatively significant fluctuations from year-to-year.

 

Although the Company believes its estimates related to its unrecognized tax benefits are reasonable, the Company can provide no assurances that the final tax outcome of these matters will not be different from that which it has reflected in its historical income

 

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Table of Contents

 

tax provisions and accruals. Any difference in the final tax outcome of these matters could have a material impact on the Company’s income tax provision and operating results in the periods in which the Company makes such determination.

 

(10)              Commitments and Contingencies

 

Legal Proceedings

 

The Company is party to various legal proceedings related to value-added tax assessments and other civil litigation. Management cannot predict the ultimate outcome of these proceedings, individually or in the aggregate, or their resulting effect on the Company’s business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Therefore, no provision for losses has been provided. The Company believes future payments related to these matters could range from $0 to approximately $1,000. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations or cash flows for the periods in which the ruling occurs and/or future periods. The Company maintains directors’ and officers’ liability, product liability, general liability and excess liability insurance coverage. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to the Company, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.

 

Non-income Tax Contingencies

 

The Company has reserved for certain foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. The Company provides provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters, including value-added taxes. As of September 30, 2012 and December 31, 2011, accrued liabilities include $6,580 and $6,921, respectively, related to non-income tax contingencies. While management believes that the assumptions and estimates used to determine this liability are reasonable, the ultimate outcome of those matters cannot presently be determined. The Company is not able at this time to predict the ultimate outcomes of those matters or to estimate the effect of the ultimate outcomes, if greater than the amounts accrued, would have on the financial condition, results of operations or cash flows of the Company.

 

Government Regulations

 

The Company is subject to governmental regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and to the Company’s direct selling system. The Company is also subject to the jurisdiction of numerous foreign tax and customs authorities. Any assertions or determinations that either the Company or the Company’s Distributors are not in compliance with existing statutes, laws, rules or regulations could potentially have a material adverse effect on the Company’s operations. In addition, in any country or jurisdiction, the adoption of new statutes, laws, rules or regulations, or changes in the interpretation of existing statutes, laws, rules or regulations could have a material adverse effect on the Company and its operations. Although management believes that the Company is in compliance, in all material respects, with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with applicable statutes, laws, rules and regulations will not be challenged by foreign authorities or that such challenges will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

(11)              Fair Value Measurements

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values of each financial instrument. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

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.

 

15



Table of Contents

 

The following table presents the Company’s hierarchy for its assets measured at fair value on a recurring basis as of September 30, 2012:

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Total

 

Investments available for sale

 

 

 

 

 

 

 

 

 

Municipal obligations

 

$

 

$

745

 

$

 

$

745

 

U.S. government security funds

 

986

 

 

 

986

 

Equity securities

 

461

 

 

 

461

 

Investment securities

 

1,317

 

 

 

1,317

 

Total assets measured at fair value on a recurring basis

 

$

2,764

 

$

745

 

$

 

$

3,509

 

 

The following table presents the Company’s hierarchy for its assets measured at fair value on a recurring basis as of December 31, 2011:

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Total

 

Investments available for sale

 

 

 

 

 

 

 

 

 

Municipal obligations

 

$

 

$

1,209

 

$

 

$

1,209

 

U.S. government security funds

 

983

 

 

 

983

 

Short-term deposits

 

 

3,104

 

 

3,104

 

Equity securities

 

381

 

 

 

381

 

Investment securities

 

1,429

 

 

 

1,429

 

Total assets measured at fair value on a recurring basis

 

$

2,793

 

$

4,313

 

$

 

$

7,106

 

 

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

 

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

 

For the nine months ended September 30, 2012 and for the year ended December 31, 2011, there were no fair value measurements using the significant unobservable inputs (Level 3).

 

The carrying amounts reflected on the consolidated balance sheet for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. The carrying amount reflected in the consolidated balance sheet for long-term debt approximates fair value due to the interest rate on the debt being variable based on current market rates. During the three months ended September 30, 2012 and 2011, the Company did not have any write-offs related to the re-measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

 

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Item 2.                            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this report, as well as the consolidated financial statements, the notes thereto, and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2011, and our Reports on Form 8-K, that have been filed with the SEC since then through the date of this report.

 

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

 

OVERVIEW

 

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

 

The Company has two reportable business segments that operate under the Nature’s Sunshine Products brand and are divided based on their geographic operations in the United States (NSP United States) and in countries outside the United States (NSP International). We also sell our products through a separate division and operating business segment, Synergy WorldWide. Synergy WorldWide offers marketing plans, Distributor compensation plans and product formulations that are sufficiently different from those of NSP United States and NSP International to warrant its treatment as a separately reportable business segment.

 

We market our products in Australia, Austria, Belarus, Canada, Colombia, Costa Rica, the Czech Republic, Denmark, the Dominican Republic, Ecuador, El Salvador, Finland, Germany, Guatemala, Honduras, Hong Kong, Indonesia, Ireland, Japan, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Moldova, Mongolia, the Netherlands, Nicaragua, Norway, Panama, Peru, the Philippines, Poland, Russia, Singapore, South Korea, Spain, Sweden, Taiwan, Thailand, the Ukraine, the United Kingdom, the United States, Venezuela and Vietnam. We export our products to several other countries, including Argentina, Australia, Chile, Israel and New Zealand.

 

During the third quarter of 2012, our consolidated net sales revenue increased approximately 0.1 percent compared to the third quarter of 2011, however, net sales revenue increased by 2.1 percent in local currencies excluding the negative impact of foreign currency fluctuations. Synergy WorldWide’s net sales revenue increased approximately 7.1 percent, however, net sales revenue increased by 13.1 percent in local currencies excluding the negative impact of foreign currency fluctuations. NSP International’s net sales revenue decreased approximately 5.4 percent compared to the same period in 2011 (or 4.4 percent excluding the negative impact of foreign currency fluctuations), while NSP United States net sales revenue increased approximately 0.5 percent compared to the same period in 2011. The significant sales revenue growth of Synergy WorldWide was from Europe and Korea during 2012. Gains in these markets were partially offset by decreases in our NSP Mexico, Peru, and Japan markets and our Synergy Japan market.

 

Over the same period, selling, general and administrative costs as a percentage of net sales revenue for the quarter decreased from 35.0 percent in the prior year period to 34.7 percent in the current year as a result of revenue growth (primarily in Synergy WorldWide), reductions in variable costs for NSP Mexico and Synergy Japan, as well as favorable currency rate fluctuation, partially offset by increases in variable costs for Synergy Europe and Korea, and NSP Russia, net changes in sales tax reserves and U.S. healthcare costs.

 

We distribute our products to consumers through an independent sales force comprised of Managers and Distributors. A person who joins our independent sales force begins as a “Distributor.” A Distributor interested in earning additional income by committing more time and effort to selling our products may earn “Manager” status. Manager status is contingent upon attaining certain purchase volume levels, recruiting additional Distributors, and demonstrating leadership abilities. Active Managers worldwide totaled approximately 28,700 and 28,200 at September 30, 2012 and 2011, respectively. Active Distributors and customers worldwide totaled approximately 656,800 and 682,300 at September 30, 2012 and 2011, respectively.

 

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RESULTS OF OPERATIONS

 

The following table summarizes our unaudited consolidated operating results in U.S. dollars and as a percentage of net sales revenue for the three months ended September 30, 2012 and 2011 (dollar amounts in thousands).

 

 

 

2012

 

2011

 

Change from

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

2012 to 2011

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

Dollar

 

Percentage

 

Net sales revenue

 

$

91,232

 

100.0

%

$

91,102

 

100.0

%

$

130

 

0.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

17,713

 

19.4

 

16,879

 

18.5

 

834

 

4.9

 

Volume incentives

 

33,155

 

36.3

 

32,733

 

35.9

 

422

 

1.3

 

SG&A expenses

 

31,659

 

34.7

 

31,845

 

35.0

 

(186

)

(0.6

)

Contract termination costs

 

 

0.0

 

14,750

 

16.2

 

(14,750

)

(100.0

)

Total operating expenses

 

82,527

 

90.4

 

96,207

 

105.6

 

(13,680

)

(14.2

)

Operating income (loss)

 

8,705

 

9.6

 

(5,105

)

(5.6

)

13,810

 

270.5

 

Other income (expense), net

 

(214

)

(0.3

)

1,204

 

1.3

 

(1,418

)

(117.8

)

Income (loss) before provision for income taxes

 

8,491

 

9.3

 

(3,901

)

(4.3

)

12,392

 

317.7

 

Provision (benefit) for income taxes

 

2,121

 

2.3

 

(1,645

)

(1.8

)

3,766

 

228.9

 

Net income (loss)

 

$

6,370

 

7.0

%

$

(2,256

)

(2.5

)%

$

8,626

 

382.4

%

 

The following table summarizes our unaudited consolidated operating results in U.S. dollars and as a percentage of net sales revenue for the nine months ended September 30, 2012 and 2011 (dollar amounts in thousands).

 

 

 

2012

 

2011

 

Change from

 

 

 

Total

 

Percent of

 

Total

 

Percent of

 

2012 to 2011

 

 

 

dollars

 

net sales

 

dollars

 

net sales

 

Dollar

 

Percentage

 

Net sales revenue

 

$

277,091

 

100.0

%

$

275,757

 

100.0

%

$

1,334

 

0.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

53,159

 

19.2

 

52,560

 

19.1

 

599

 

1.1

 

Volume incentives

 

100,276

 

36.2

 

100,421

 

36.4

 

(145

)

(0.1

)

SG&A expenses

 

95,466

 

34.4

 

97,458

 

35.3

 

(1,992

)

(2.0

)

Contract termination costs

 

 

0.0

 

14,750

 

5.4

 

(14,750

)

(100.0

)

Total operating expenses

 

248,901

 

89.8

 

265,189

 

96.2

 

(16,288

)

(6.1

)

Operating income

 

28,190

 

10.2

 

10,568

 

3.8

 

17,622

 

166.7

 

Other income (expense), net

 

(159

)

(0.1

)

1,049

 

0.4

 

(1,208

)

(115.2

)

Income before provision for income taxes

 

28,031

 

10.1

 

11,617

 

4.2

 

16,414

 

141.3

 

Provision for income taxes

 

7,147

 

2.6

 

1,637

 

0.6

 

5,510

 

336.6

 

Net income

 

$

20,884

 

7.5

%

$

9,980

 

3.6

%

$

10,904

 

109.3

%

 

Net Sales Revenue

 

Consolidated net sales revenue for the three and nine months ended September 30, 2012 was $91.2 million and $277.1 million compared to $91.1 million and $275.8 million for the same periods in 2011, increases of approximately 0.1 percent and 0.5 percent, respectively, however, in local currencies, net sales increased 2.1 percent and 2.0 percent for the three and nine months ended September 30, 2012, respectively. Fluctuation in foreign exchange rates had a $1.8 million and $4.3 million unfavorable impact on net sales for the three and nine months ended September 30, 2012, respectively. The increases in net sales revenue for the three and nine months ended September 30, 2012 compared to the same periods in 2011 are primarily due to growth in Synergy WorldWide, offset by declines in NSP International.

 

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NSP United States

 

Net sales revenue for our NSP United States segment for the three and nine months ended September 30, 2012 was $33.7 million and $104.1 million compared to $33.5 million and $105.1 million for the same periods in 2011, or an increase of 0.5 percent and a decrease of 1.0 percent, respectively, in 2012 compared to 2011. Net sales for NSP United States core products (herbal products vitamin, mineral, and other nutritional supplements, and personal care products) increased by 1.0 percent, but were offset by the discontinuance of non-core products (other products including essential oils, sales aids and other miscellaneous products) for the quarter. Active Managers within NSP United States totaled approximately 5,300 and 5,600 at September 30, 2012 and 2011, respectively. Active Distributors and customers within NSP United States totaled approximately 191,500 and 210,300 at September 30, 2012 and 2011, respectively. Managers and Distributors within NSP United States are predominantly practitioners of nutritional supplement therapies and retailers and consumers of our products. The number of active Managers, Distributors and customers decreased due to lower retention, partially offset by a modest improvement in recruiting.

 

NSP United States includes both English and Spanish language sales divisions, of which the English language division is approximately 80 percent of segment net sales revenue. The English language division net sales revenue decreased $0.2 million and $1.0 million, or a decrease of 0.9 percent and 1.2 percent, respectively, for the three and nine months ended September 30, 2012, compared to the same period in 2011. The Spanish language division net sales revenue increased $0.4 million and was flat, or 5.8 percent and 0.0 percent, respectively, for the three and nine months ended September 30, 2012, compared to the same period in 2011.

 

NSP International

 

NSP International reported net sales revenue for the three and nine months ended September 30, 2012 of $31.3 million and $97.2 million, compared to $33.1 million and $102.7 million for the same periods in 2011, decreases of approximately 5.4 percent and 5.3 percent, respectively, however, in local currencies, net sales decreased 4.4 percent and 4.2 percent, respectively. Fluctuation in foreign exchange rates had a $0.3 million and $1.1 million unfavorable impact on net sales for the three and nine months ended September 30, 2012, respectively. Active Managers within NSP International totaled approximately 20,200 and 20,000 at September 30, 2012 and 2011, respectively. Active Distributors and customers within NSP International totaled approximately 376,200 and 387,000 at September 30, 2012 and 2011, respectively. Managers and Distributors within NSP International are predominantly practitioners of nutritional supplement therapies and retailers or consumers of our products, with the exception of our Russian markets which are more network marketing oriented. The number of active Distributors and customers decreased in NSP International due to lower retention in a small number of markets, partially offset by a modest improvement in recruiting.

 

Notable activity in the following markets contributed to the results of NSP International:

 

In our Russian markets (Russia, the Ukraine, Belarus and several other Eastern European nations), net sales revenues decreased approximately $0.1 million and $0.4 million, or a decrease of 0.9 percent and 1.0 percent, for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. The decrease in year-to-date net sales revenue was related to the depreciation of the Russian ruble, which has adversely affected our Russian Distributors’ ability to purchase our products, and may continue to adversely affect sales going forward. Net sales revenue in Russia decreased by $0.5 million and $0.9 million for the three and nine months ended September 30, 2012, respectively, compared to the same period in 2011. The decrease in Russian sales was partially offset by sales increases in Belarus and the Ukraine for the three and nine months ended September 30, 2012, respectively.

 

In Mexico, our net sales revenues decreased approximately $0.3 million and $1.4 million, or 11.4 percent and 14.8 percent, for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. In local currency, net sales decreased 5.2 percent and 6.2 percent, respectively, compared to the same periods in 2011. Fluctuations in foreign exchange rates had a $0.3 million and $0.8 million unfavorable impact on net sales for the three and nine months ended September 30, 2012. The decrease in sales is due to lower Manager and Distributor activity, which has been compounded by a local management team that is currently being restructured and augmented.

 

In Peru, our net sales revenues decreased approximately $0.7 million and $2.0 million, or 74.9 percent and 65.0 percent, for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. Fluctuations in foreign exchange rates had a nominally favorable impact on net sales for the periods. The decrease in net sales is principally due to a change in local regulations that has restricted our ability to sell several of our key products in this market through a direct selling business model. We continue to evaluate our product mix and selling model for Peru.

 

In Japan, our net sales revenues decreased approximately $0.1 million and $0.8 million, or 7.2 percent and 14.7 percent, for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011.  Fluctuations in foreign exchange rates had a nominally favorable impact on net sales for the periods compared to the same periods in 2011. The decrease in local currency sales is primarily due to the continued lower activity in our existing Manager and Distributor base following the 2011 natural disasters.

 

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Synergy WorldWide

 

Synergy WorldWide reported net sales revenue for the three and nine months ended September 30, 2012 of $26.3 million and $75.9 million, compared to $24.5 million and $68.0 million in 2011, increases of approximately 7.1 percent and 11.5 percent, respectively. In local currencies, net sales increased 13.1 percent and 16.2 percent for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. Fluctuations in foreign exchange rates had a $1.5 million and $3.2 million unfavorable impact on net sales for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. Active Managers within Synergy WorldWide totaled approximately 3,200 and 2,600 at September 30, 2012 and 2011, respectively. Active Distributors and customers within Synergy WorldWide totaled approximately 89,100 and 85,000 at September 30, 2012 and 2011, respectively.

 

Notable activity in the following markets contributed to the results of Synergy WorldWide:

 

In Europe, our net sales revenues increased approximately $0.6 million and $4.6 million, or 9.4 percent and 28.8 percent, for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011, however, in local currency, our net sales increased 23.6 percent and 41.2 percent, respectively, compared to the same periods in 2011.  Fluctuations in foreign exchange rates had a $0.9 million and $2.0 million unfavorable impact on net sales for the three and nine months ended September 30, 2012 compared to the same periods in 2011. Strong Distributor leadership in recruiting and training efforts continues to effectively build our Distributor base thereby driving increased market penetration.

 

In Korea, our net sales revenues increased approximately $2.1 million and $7.2 million, or 38.0 percent and 51.9 percent, for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011, however, in local currency, our net sales increased 44.6 percent and 58.2 percent, compared to the same periods in 2011.  Fluctuations in foreign exchange rates had a $0.4 million and $0.9 million unfavorable impact on net sales for the three and nine months ended September 30, 2012, compared to the same periods in 2011. Net sales growth is due to continued collaboration between the Company and key Distributor leadership in developing sales groups with a strong selling system and a broad product line that is well accepted in Korea.

 

In Japan, our net sales revenues decreased approximately $1.0 million and $3.3 million, or 27.1 percent and 29.9 percent, for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. Fluctuations in foreign exchange rates had a nominally favorable impact on net sales for the periods. The decrease in local currency sales is partially due to the challenging Japanese direct selling market and the continued difficulty in rebounding since the 2011 natural disasters. In addition, unusually high product returns during the first quarter related to a specific promotion contributed significantly to reduced net sales revenue for the nine months. Product returns for the second and third quarters were insignificant and the product returns in the first quarter were not related to product quality.

 

Further information related to NSP United States, NSP International and Synergy WorldWide business segments is set forth in Note 8 to the Unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 of this report.

 

Cost of Goods Sold

 

Cost of goods sold as a percent of net sales revenue increased to 19.4 percent and 19.2 percent for the three and nine months ended September 30, 2012, compared to 18.5 percent and 19.1 percent for the same periods in 2011. Changes in the cost of goods sold are primarily the result of changes in product mix between markets. The cost of goods sold rates were greater in 2012 than in 2011 due to promotions related to new product launches and national/regional conventions in addition to rising production costs of certain raw materials.  While the Company intends to seek continued cost reductions where possible, pricing pressure on raw materials, fuel costs and other factors could adversely affect our ability to reduce or maintain our current cost of goods sold rate in the future.

 

Volume Incentives

 

Volume incentives are a significant part of our direct sales marketing program, and represent commission payments made to our independent Managers and Distributors. These payments are designed to provide incentives for reaching higher sales levels and for recruiting additional Distributors.  Volume incentives vary slightly, on a percentage basis, by product due to our pricing policies and commission plans in place in our various operations.  Volume incentives as a percent of net sales revenue increased to 36.3 percent and decreased to 36.2 percent for the three and nine months in 2012, compared to 35.9 percent and 36.4 percent for the same periods in 2011.

 

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Table of Contents

 

Selling, General and Administrative

 

Selling, general and administrative expenses decreased to 34.7 percent and 34.4 percent of net sales revenue for the three and nine months ended September 30, 2012, compared to 35.0 percent and 35.3 percent in 2011, or by approximately $0.2 million and $2.0 million to $31.7 million and $95.5 million for the three and nine months ended September 30, 2012, respectively.

 

Significant increases to selling, general and administrative expenses during the three and nine months ended September 30, 2012, compared to the same period in 2011 included:

 

·                  $1.2 million and $3.5 million of increased variable costs related to the sales growth of Synergy WorldWide in Europe, and Korea; and

·                  $1.1 million and $2.3 million of increased compensation related costs for U.S. employees.

 

Significant decreases to selling, general and administrative expenses during the three and nine months ended September 30, 2012, compared to the same period in 2011 included:

 

·                  $0.7 million and $2.5 million decrease in variable costs related to lower sales of NSP Japan and the United States and Synergy Japan;

·                  $0.6 million and $0.6 million of decreased professional fees related to the United States;

·                  $0.5 million and $1.1 million of favorable currency fluctuations;

·                  $0.4 million and $0.2 million for U.S. incentive related trips;

·                  $0.2 million and $1.4 million of decreased professional fees related to our Russian business as a result of the NutriPlus LLC settlement; and

·                  $0.0 million and $2.9 million of decreased royalty costs related to our Russian business as a result of the NutriPlus LLC settlement.

 

Contract Termination Costs

 

In 1999 and 2000, the Company and NutriPlus LLC (“NutriPlus”) entered into an Asset Purchase Agreement and subsequent Settlement Agreement (together the “Purchase Agreement”) under which the Company acquired certain assets in order to establish its Russian business, and NutriPlus acquired rights to receive certain royalty payments from the Company expressed as a percentage of the Company’s net sales in its Russian business.

 

On July 8, 2011, the Company and NutriPlus entered into a settlement agreement, in which the Company agreed to pay NutriPlus $21.7 million for the release of all past and future royalty obligations.  Of the $21.7 million, the Company applied $7.0 million toward previously accrued and expensed but unpaid royalties, and $14.7 million in exchange for the contract termination and extinguishment of future royalty obligations.

 

As a result of the settlement, our selling general and administrative expenses benefitted from the elimination of these related royalty expenses (as noted above).  If the Company had not entered into the settlement, our estimated royalty costs would have been $1.3 million and $4.2 million for the three and nine months ended September 30, 2012, and would have increased by $1.3 million for both the three and nine month periods ended September 30, 2011.  As a result of the settlement, the Company has been able to use a portion of the savings from the reduction of royalties to invest in programs and activities designed to develop future revenue growth.

 

See Note 1, Basis of Presentation in the Condensed Notes to the Consolidated Financial Statements for further discussion.

 

Operating Income (Loss)

 

Consolidated operating income increased approximately $13.8 million during the three months ended September 30, 2012, compared to the same period in 2011, from an operating loss of $5.1 million to $8.7 million. For the nine months ended September 30, 2012, operating income increased approximately $17.6 million, compared to the same period in 2011, from $10.6 million to $28.2 million. Excluding the NutriPlus related contract termination costs of $14.7 million, consolidated pro forma operating income decreased approximately $0.9 million during the three months ended September 30, 2012, compared to the same period in 2011, from $9.6 million to $8.7 million. For the nine months ended September 30, 2011, pro forma operating income increased approximately $2.9 million, compared to the same period in 2010, from $25.3 million to $28.2 million. Pro forma operating income decreased to 9.6 percent and increased to 10.2 percent of net sales for the three and nine months ended September 30, 2011, compared to 10.6 percent and 9.2 percent for the same periods in 2011, respectively.

 

Operating income for NSP United States increased $0.4 million and was flat for the three and nine months ended September 30, 2012, compared to the same period in 2011, from $2.3 million and $9.8 million to $2.7 million and $9.8 million, respectively. The increase in operating income for the three months ended September 30, 2012 compared to the same period 2011 is primarily the result of the increase in net sales revenue as well as a decrease of professional fees expense offset by increases in cost of goods sold and other selling, general and administrative expenses related to employee compensation costs.

 

Operating income for NSP International increased approximately $13.5 million and $17.5 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, from an operating loss of $10.1 million and operating income of

 

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$6.2 million to operating income of $3.4 million and $11.3 million, respectively.  Excluding the NutriPlus related contract termination costs of $14.7 million, pro forma operating income for NSP International decreased approximately $1.2 million and increased $2.8 million for the three and nine months ended September 30, 2012, compared to the same periods in 2011, from $4.6 million and $8.5 million to $3.4 million and $11.3 million, respectively. The quarter-to-date decrease in pro forma operating income was primarily the result of lower net sales in our Japan, Mexico and Peru markets.  The increase in year-to-date operating income was primarily the result of the elimination of royalty fees and lower professional fees in our Russian markets related to the termination of the Company’s contract with NutriPlus, offset by lower net sales in our Japan, Mexico and Peru markets.

 

Operating income for Synergy WorldWide decreased $0.1 million and increased $0.1 million for the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011, from $2.6 million and $7.0 million to $2.6 million and $7.0 million, respectively.

 

Other Income (Expense), Net

 

Other income (expense), net for the three and nine months ended September 30, 2012 decreased $1.4 million and $1.2 million, respectively, compared to the same periods in 2011. The decrease in other income (expense), net in 2012 is due to increased foreign exchange losses in 2012 compared to 2011 and by the receipt of $0.7 million in restricted cash in Venezuela that had been previously written-down that was recovered in 2011.

 

Income Taxes

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the periods in which they occur. For the three months ended September 30, 2012 and 2011, the Company’s provision (benefit) for income taxes, as a percentage of income (loss) before income taxes was 25.0 percent and (42.2) percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.  For the nine months ended September 30, 2012 and 2011, the Company’s provision for income taxes, as a percentage of income before income taxes was 25.5 percent and 14.1 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.8 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.2 percent).

 

The difference between the effective tax rate and the U.S. federal statutory rate for the three months ended September 30, 2011 was primarily attributed to the pretax loss related to contract termination costs, in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and a favorable inflation adjustment related to Venezuela (-3.9 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2012 was primarily attributed to a domestic valuation allowance release related to the utilization of foreign tax credits (-6.5 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-4.0 percent).

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2011 was primarily attributed to contract termination costs (-9.5 percent), in addition to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and a favorable inflation adjustment related to Venezuela (-11.5 percent).

 

The Company’s U.S. federal income tax returns for 2003 through 2005, and 2009 through 2011 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2004 through 2011. The Internal Revenue Service (“IRS”) is currently conducting an audit of the Company’s U.S. federal income tax returns for the 2009 and 2010 tax years.

 

In October 2009, the IRS issued an examination report formally proposing adjustments with respect to the 2003 through 2005 taxable years, which primarily related to the prices that were charged in intra-group transfers of property and the disallowance of related deductions. The Company challenged the IRS proposals, and took the matter before the Office of Appeals of the Internal Revenue Service.  A settlement was reached with IRS Appeals and a proposed settlement agreement was signed by NSP in January 2012. The Company has made all required payments as of September 30, 2012 related to this matter and, absent further comment from the IRS, the examination period for the 2003 through 2005 taxable years will close on December 31, 2012.

 

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During 2011, the IRS issued an examination report formally proposing adjustments with respect to the 2006 through 2008 taxable years.  As with the previous examination cycle discussed above, the adjustments related primarily to the prices that were charged in intra-group transfers of property and the disallowance of related deductions.  The Company reached a settlement of the issues with the IRS examination team and an agreement was signed by the Company in January 2012.  On March 7, 2012, the Company received a letter from the IRS examination team stating that they accepted the examination report and do not plan to make additional changes. The Company has made all required payments related to this matter and the examination period for the 2006 through 2008 taxable years has now closed.

 

As of September 30, 2012, the Company had accrued $9,772 related to unrecognized tax positions compared with $10,426 as of December 31, 2011. This net decrease was primarily attributed to the expiration of the statute of limitations on certain liabilities in various foreign jurisdictions.

 

Changes to the effective rate due to dividends received from foreign subsidiaries, impact of foreign tax credits and the unremitted earnings calculation are expected to be recurring; however, depending on various factors, the changes may be favorable or unfavorable in a particular period. The Company’s aggregate consolidated effective tax rate will typically reflect differences between the lower statutory rates in foreign markets compared to the U.S. statutory rate of 35 percent. Given the large number of jurisdictions in which the Company does business and the number of factors that can impact effective tax rates in any given year, the consolidated effective rate is likely to reflect relatively significant fluctuations from year-to-year.

 

Although the Company believes its estimates related to its unrecognized tax benefits are reasonable, the Company can provide no assurances that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. Any difference in the final tax outcome of these matters could have a material impact on the Company’s income tax provision and operating results in the periods in which the Company makes such determination.

 

Product Categories

 

Our line of products includes herbal products, vitamin, mineral and other nutritional supplements, personal care products and other complementary products such as sales aids. We purchase herbs and other raw materials in bulk and, after quality control testing, we formulate, encapsulate, tablet or concentrate them, and package them for shipment. Most of our products are manufactured at the Company’s owned and operated facility in Spanish Fork, Utah. Contract manufacturers produce some of our vitamin, mineral and other nutritional supplements, personal care products and certain other miscellaneous products in accordance with our specifications and standards. We have implemented stringent quality control procedures to verify that our contract manufacturers have complied with our specifications and standards.

 

Presented below are the U.S. dollar amounts and associated revenue percentages from the sale of herbal products, vitamin, mineral and other nutritional supplements, personal care products, and other complementary products for the three and nine months ended September 30, 2012 and 2011, by business segment. The Company has two business segments that operate under the Nature’s Sunshine Products brand and are divided based on their geographic operations in the United States (NSP United States) and in countries outside the United States (NSP International). The Company’s third business segment operates under the Synergy WorldWide brand, which distributes its products through different marketing and distributor compensation plans and products with formulations that are sufficiently different from those of the NSP United States and NSP International to warrant accounting for these operations as a separate business segment.

 

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

 

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Three Months Ended
September 30,

 

 

 

2012

 

2011

 

NSP United States:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

17,809

 

52.9

%

$

17,441

 

52.0

%

Vitamin, mineral and other nutritional supplements

 

14,296

 

42.4

 

14,280

 

42.6

 

Personal care products

 

970

 

2.9

 

1,011

 

3.0

 

Other products

 

620

 

1.8

 

787

 

2.4

 

 

 

33,695

 

100.0

%

33,519

 

100.0

%

 

 

 

 

 

 

 

 

 

 

NSP International:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

16,913

 

54.1

%

$

18,502

 

56.0

%

Vitamin, mineral and other nutritional supplements

 

12,037

 

38.5

 

12,053

 

36.5

 

Personal care products

 

1,944

 

6.2

 

2,128

 

6.4

 

Other products

 

381

 

1.2

 

376

 

1.1

 

 

 

31,275

 

100.0

%

33,059

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

10,005

 

38.1

%

$

9,797

 

40.0

%

Vitamin, mineral and other nutritional supplements

 

14,510

 

55.3

 

12,699

 

51.8

 

Personal care products

 

1,394

 

5.3

 

1,378

 

5.6

 

Other products

 

353

 

1.3

 

650

 

2.6

 

 

 

26,262

 

100.0

%

24,524

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Consolidated:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

44,727

 

49.0

%

$

45,740

 

50.2

%

Vitamin, mineral and other nutritional supplements

 

40,843

 

44.8

 

39,032

 

42.8

 

Personal care products

 

4,308

 

4.7

 

4,517

 

5.0

 

Other products

 

1,354

 

1.5

 

1,813

 

2.0

 

 

 

91,232

 

100.0

%

91,102

 

100.0

%

 

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Table of Contents

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

NSP United States:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

56,010

 

53.8

%

$

55,344

 

52.7

%

Vitamin, mineral and other nutritional supplements

 

43,061

 

41.4

 

43,204

 

41.1

 

Personal care products

 

2,976

 

2.9

 

3,328

 

3.2

 

Other products

 

2,006

 

1.9

 

3,185

 

3.0

 

 

 

104,053

 

100.0

%

105,061

 

100.0

%

 

 

 

 

 

 

 

 

 

 

NSP International:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

52,188

 

53.7

%

$

56,244

 

54.8

%

Vitamin, mineral and other nutritional supplements

 

37,191

 

38.3

 

37,631

 

36.6

 

Personal care products

 

6,660

 

6.8

 

7,473

 

7.3

 

Other products

 

1,148

 

1.2

 

1,313

 

1.3

 

 

 

97,187

 

100.0

%

102,661

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Synergy WorldWide:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

29,982

 

39.5

%

$

27,428

 

40.3

%

Vitamin, mineral and other nutritional supplements

 

40,575

 

53.5

 

34,668

 

51.0

 

Personal care products

 

4,020

 

5.3

 

4,230

 

6.2

 

Other products

 

1,274

 

1.7

 

1,709

 

2.5

 

 

 

75,851

 

100.0

%

68,035

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Consolidated:

 

 

 

 

 

 

 

 

 

Herbal products

 

$

138,180

 

49.9

%

$

139,016

 

50.4

%

Vitamin, mineral and other nutritional supplements

 

120,827

 

43.6

 

115,503

 

41.9

 

Personal care products

 

13,656

 

4.9

 

15,031

 

5.5

 

Other products

 

4,428

 

1.6

 

6,207

 

2.2

 

 

 

277,091

 

100.0

%

275,757

 

100.0

%

 

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The following table summarizes our product lines by category:

 

Category