NATURES SUNSHINE PRODUCTS INC - Quarter Report: 2011 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2011

 

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)

 

 

75 East 1700 South

Provo, Utah 84606

(Address of principal executive offices and zip code)

 

(801) 342-4300

(Registrant’s telephone number including area code)

 

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

 

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

 

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

 

 

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

 

The number of shares of Common Stock, no par value, outstanding on October 31, 2011 was 15,566,802 shares.

 

 

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NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

 

For the Quarter Ended September 30, 2011

 

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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	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	28
	Item 4.	Controls and Procedures	31
Part II. Other Information
	Item 1.	Legal Proceedings	32
	Item 1A.	Risk Factors	32
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
	Item 3.	Default Upon Senior Securities	32
	Item 4.	Removed and Reserved	32
	Item 5.	Other Information	32
	Item 6.	Exhibits	32

 

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PART I FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

 

		September 30, 2011			December 31, 2010
Assets
Current Assets:
Cash and cash equivalents		$	54,103		$	47,604
Accounts receivable, net of allowance for doubtful accounts of $686 and $918, respectively		11,765			5,947
Investments available for sale		4,551			6,470
Inventories		38,454			36,235
Deferred income tax assets		4,976			4,582
Prepaid expenses and other		5,052			5,700
Total current assets		118,901			106,538
Property, plant and equipment, net		25,208			27,391
Investment securities		1,423			1,778
Intangible assets, net		1,191			1,303
Deferred income tax assets		16,866			12,916
Other assets		11,594			9,489
		$	175,183		$	159,415
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable		$	5,130		$	4,855
Accrued volume incentives		19,789			18,619
Accrued liabilities		29,777			34,601
Deferred revenue		3,042			3,385
Current installments of long-term debt		3,283			—
Income taxes payable		4,503			3,708
Total current liabilities		65,524			65,168
Liability related to unrecognized tax benefits		18,559			21,366
Long-term debt		6,717			—
Deferred compensation payable		1,423			1,778
Other liabilities		2,574			2,721
Total long-term liabilities		29,273			25,865
Commitments and Contingencies (Note 12)
Shareholders’ Equity:
Common stock, no par value, 50,000 shares authorized, 15,567 and 15,533 shares issued and outstanding as of September 30, 2011 and December 31, 2010		70,043			67,752
Retained earnings		18,258			8,278
Accumulated other comprehensive loss		(7,915		)	(7,648		)
Total shareholders’ equity		80,386			68,382
		$	175,183		$	159,415

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share information)

(Unaudited)

 

		Three Months Ended September 30,
		2011			2010
Net sales revenue (net of the rebate portion of volume incentives of $10,877 and $10,726, respectively)		$	91,102		$	86,096
Cost and expenses:
Cost of goods sold		16,879			16,632
Volume incentives		32,733			32,065
Selling, general and administrative		31,845			33,523
Contract termination costs		14,750			—
		96,207			82,220
Operating income (loss)		(5,105		)	3,876
Other income, net		1,204			375
Income (loss) before provision for income taxes		(3,901		)	4,251
(Benefit) provision for income taxes		(1,645		)	1,573
Net income (loss) from continuing operations		(2,256		)	2,678
Loss from discontinued operations		—			(8,418		)
Net loss		$	(2,256	)	$	(5,740	)
Basic and diluted net income (loss) per common share
Basic:
Net income (loss) from continuing operations		$	(0.14	)	$	0.17
Loss from discontinued operations		$	—		$	(0.54	)
Net loss		$	(0.14	)	$	(0.37	)
Diluted:
Net income (loss) from continuing operations		$	(0.14	)	$	0.17
Loss from discontinued operations		$	—		$	(0.54	)
Net loss		$	(0.14	)	$	(0.37	)
Weighted average basic common shares outstanding		15,562			15,514
Weighted average diluted common shares outstanding		15,562			15,612

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (Amounts in thousands, except per share information)

(Unaudited)

 

		Nine Months Ended September 30,
		2011			2010
Net sales revenue (net of the rebate portion of volume incentives of $33,815 and $32,942, respectively)		$	275,757		$	260,029
Cost and expenses:
Cost of goods sold		52,560			51,308
Volume incentives		100,421			97,162
Selling, general and administrative		97,458			103,840
Contract termination costs		14,750			—
		265,189			252,310
Operating income		10,568			7,719
Other income, net		1,049			2,374
Income before provision for income taxes		11,617			10,093
Provision for income taxes		1,637			1,238
Net income from continuing operations		9,980			8,855
Loss from discontinued operations		—			(9,388		)
Net income (loss)		$	9,980		$	(533	)
Basic and diluted net income per common share
Basic:
Net income from continuing operations		$	0.64		$	0.57
Loss from discontinued operations		$	—		$	(0.60	)
Net income (loss)		$	0.64		$	(0.03	)
Diluted:
Net income from continuing operations		$	0.64		$	0.57
Loss from discontinued operations		$	—		$	(0.60	)
Net income (loss)		$	0.64		$	(0.03	)
Weighted average basic common shares outstanding		15,544			15,512
Weighted average diluted common shares outstanding		15,674			15,606

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	9,980		$	(533	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Write-off of cumulative translation adjustments		—			7,364
Provision for doubtful accounts		(101		)	182
Depreciation and amortization		3,204			3,243
Share-based compensation expense		1,917			325
Loss on sale of property and equipment		14			50
Deferred income taxes		(4,419		)	146
Loss on restricted cash		—			497
Amortization of bond discount		13			17
Purchase of trading investment securities		(59		)	(141		)
Proceeds from sale of trading investment securities		338			109
Realized and unrealized losses (gains) on investments		25			(93		)
Amortization of prepaid taxes related to gain on intercompany sales		—			813
Foreign exchange losses (gains)		106			(3,231		)
Changes in assets and liabilities:
Accounts receivable		(5,691		)	198
Inventories		(2,313		)	3,224
Prepaid expenses and other current assets		607			(595		)
Other assets		(2,155		)	(420		)
Accounts payable		428			425
Accrued volume incentives		1,224			1,216
Accrued liabilities		(4,554		)	2,552
Deferred revenue		(343		)	(1,286		)
Income taxes payable		848			(6,704		)
Liability related to unrecognized tax benefits		(2,834		)	2,750
Deferred compensation payable		(355		)	112
Net cash (used in) provided by operating activities		(4,120		)	10,220
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(1,117		)	(2,118		)
Proceeds from sale of investments available for sale		5,650			109
Purchase of investments available for sale		(3,867		)	—
Net cash provided by (used in) investing activities		666			(2,009		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt		10,000			—
Proceeds from the exercise of stock options		372			31
Net cash provided by financing activities		10,372			31
Effect of exchange rates on cash and cash equivalents		(419		)	1,877
Net increase in cash and cash equivalents		6,499			10,119
Cash and cash equivalents at the beginning of the period		47,604			35,538
Cash and cash equivalents at end of the period		$	54,103		$	45,657
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	7,851		$	4,797

 

See accompanying notes to condensed consolidated financial statements.

 

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per-share information)

(Unaudited)

 

(1)       Basis of Presentation

 

Nature’s Sunshine Products, Inc. and its subsidiaries (hereinafter referred to collectively as the “Company”) are primarily engaged in the manufacturing and marketing of nutritional, herbal, weight management, energy and other complementary products. Nature’s Sunshine Products, Inc. is a Utah corporation with its principal place of business in Provo, Utah. The Company sells its products to a sales force of independent Distributors and Managers who use the products themselves or resell them to other Distributors or consumers.

 

The Company markets its products in Australia, Austria, Belarus, Canada, the Czech Republic, Colombia, Costa Rica, Denmark, the Dominican Republic, Ecuador, El Salvador, Germany, Guatemala, Honduras, Hong Kong, Indonesia, Ireland, Japan, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Mongolia, the Netherlands, Nicaragua, Norway, Panama, Peru, the Philippines, Poland, Russia, Singapore, South Korea, Sweden, Taiwan, Thailand, 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, New Zealand and Norway.

 

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, 2011, and for the three and nine-month periods ended September 30, 2011 and 2010.  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, 2011.

 

These condensed consolidated financial statements should 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, 2010.

 

Discontinued Operations

 

As more fully described in Note 2, “Discontinued Operations,” the Company ceased the operations of its Brazilian subsidiary in the third quarter of 2010, and the results of its operations are classified as discontinued operations in the Company’s statements of operations and accompanying notes for all periods presented.

 

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

 

As of January 1, 2010, Venezuela was designated as a highly inflationary economy. Accordingly, the U.S. dollar became the functional currency for the Company’s subsidiary in Venezuela. All gains and losses resulting from the re-measurement of its financial statements are determined using official rates. On January 8, 2010, the Venezuelan government announced the devaluation of the bolivar against the U.S. dollar.

 

Currency restrictions enacted by the government of Venezuela require approval from the government’s currency control agency organization in order for the Company’s subsidiary in Venezuela to obtain U.S. dollars at the official exchange rate to pay for imported products or to repatriate dividends back to the Company. Prior to January 1, 2010, the market rate, which is substantially lower than the official rate, was available to obtain U.S. dollars or other currencies without approval of the government’s currency control organization. In 2010, the government of Venezuela enacted additional currency restrictions, which effectively replaced the market rate with the System for Foreign Currency Denominated Securities (“SITME”), which is administered by the Venezuela Central Bank. Under SITME, entities domiciled in Venezuela can obtain U.S. dollar denominated securities in limited quantities each month through banking institutions approved by the government.

 

At this time, the Company is not able to reasonably estimate the future state of exchange controls in Venezuela and its availability of U.S. dollars at the official exchange rate or at the SITME rate. However, the Company has been successful repatriating funds from Venezuela for imported products using the SITME rate. The Company re-measures its results in Venezuela at the SITME rate, which was approximately 5.3 bolivars per U.S. dollar as of September 30, 2011.

 

As a result of the events described in the preceding paragraphs, the Company recorded a gain of $3,668 in the first quarter of 2010 in connection with the re-measurement of its balance sheet to reflect the highly inflationary designation and the devaluation due to the negative position of the Company’s Venezuelan subsidiary’s net monetary assets, which is recorded in

 

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foreign exchange gains or losses, a part of other income. The success of future operations will be affected by several factors, including the Company’s ability to take actions to mitigate the effect of devaluation, further actions of the Venezuelan government and economic conditions in Venezuela, such as inflation and consumer spending.

 

During the three months ended September 30, 2011 and 2010, the Company’s Venezuelan subsidiary’s net sales revenue represented approximately 1.4 percent and 2.0 percent of consolidated net sales revenue, respectively. During the nine months ended September 30, 2011 and 2010, its net sales revenue represented approximately 1.4 percent and 1.8 percent of consolidated net sales revenue, respectively. The Company’s Venezuelan subsidiary held total assets of $8,471 and $8,024 (which includes an intercompany receivable denominated in U.S. dollars of $2,076 and $1,978) and net assets of $5,444 and $4,185 at September 30, 2011 and December 31, 2010, respectively.

 

Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04 Fair Value Measurement (Topic 820): “Amendments to Achieve Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. This update addresses how to measure fair value and requires new disclosures about fair value measurements. The amendments in this update are effective for interim and annual periods beginning after December 15, 2011.

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05 for Comprehensive Income (Topic 220): “Presentation of Comprehensive Income”. This update improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. This update is effective for interim and annual periods beginning after December 15, 2011.

 

 (2)      Discontinued Operations

 

During 2010, the Company ceased its operations in Brazil as a result of declining sales and increased regulatory restrictions, which made it difficult for the Company to register and sell key products in that market. This market was part of the Company’s NSP International segment.

 

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

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
Net sales revenue		$	—		$	211		$	—		$	682
Loss before income tax provision		$	—		$	(8,418	)	$	—		$	(9,388	)
Income tax provision		—			—			—			—
Loss from discontinued operations, net of tax		$	—		$	(8,418	)	$	—		$	(9,388	)

 

The cash flows from our discontinued operations are included in the Company’s operating cash flows, but were insignificant.

 

(3)       Inventories

 

Inventories consist of the following:

 

		September 30,			December 31,
		2011			2010
Raw Materials		$	10,727		$	9,177
Work in Progress		1,059			956
Finished Goods		26,668			26,102
		$	38,454		$	36,235

 

(4)       Intangible Assets

 

At September 30, 2011 and December 31, 2010, intangibles for product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $571 and $460, and a net amount of $1,191 and $1,303, 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, 2011 and 2010 was $37 and $30, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2011 and 2010 was $111 and $89, respectively.  Estimated amortization expense for each of the five succeeding fiscal years thereafter is $149.

 

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(5)       Investments

 

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

 

As of September 30, 2011		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Municipal obligations		$	1,365		$	66		$	—		$	1,431
U.S. government securities funds		982			—			(1		)	981
Short-term deposits		1,783			—			—			1,783
Equity securities		228			133			(5		)	356
Total short-term investment securities		$	4,358		$	199		$	(6	)	$	4,551

 

As of December 31, 2010		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Municipal obligations		$	1,883		$	77		$	—		$	1,960
U.S. government securities funds		989			—			(15		)	974
Short-term deposits		3,148			—			—			3,148
Equity securities		228			160			—			388
Total short-term investment securities		$	6,248		$	237		$	(15	)	$	6,470

 

The municipal obligations held at a fair value of $1,431 at September 30, 2011 all mature in less than five years.

 

During the nine-month periods ended September 30, 2011 and 2010, the proceeds from the sales of available-for-sale securities were $5,650 and $109, 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, 2011 and 2010, respectively.

 

The Company’s trading securities portfolio totaled $1,423 at September 30, 2011 and $1,778 at December 31, 2010, and generated losses of $121 and gains of $102 for the three months ended September 30, 2011 and 2010, respectively and generated losses of $46 and gains of $76 for the nine months ended September 30, 2011 and 2010, respectively.

 

As of September 30, 2011 and December 31, 2010, the Company had unrealized losses of $1 and $15, respectively, in its U.S. government securities funds. These losses are due to the interest rate sensitivity of the U.S. government securities funds.

 

(6)       Long-Term Debt

 

On August 9, 2011, the Company entered into a Revolving Credit agreement with Wells Fargo Bank, National Association 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 annual commitment fee of 0.25 percent on the unused portion of the commitment. At September 30, 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, National Association and has a maturity date of August 9, 2014 and a variable interest rate of LIBOR plus 1.25 percent (1.50 percent as of September 30, 2011). The term loan has been collateralized by the Company’s manufacturing facility in Spanish Fork, Utah.

 

Long-term debt at September 30, 2011 and December 31, 2010 consists of the following:

 

		September 30,			December 31,
		2011			2010
Term loan in monthly installments of approximately $284, including interest, secured by real estate		$	10,000		$	—
Total long-term debt		10,000			—
Less current installments		(3,283		)	—
Long-term debt less current installments		$	6,717		$	—

 

The various debt agreements contain restrictions on liquidity, leveraging, 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 the transfer of assets except in the ordinary course of business.  The Company is currently in compliance with these debt covenants.

 

The aggregate maturities of long-term debt for each of the next five years are: $816 in 2011, $3,296 in 2012, $3,346 in 2013 and $2,542 in 2014.

 

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(7)       Net Income (Loss) Per Share

 

Basic net income (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) 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 (loss) 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, 2011 and 2010:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
Net income (loss) available to common stockholders
Net income (loss) from continuing operations		$	(2,256	)	$	2,678		$	9,980		$	8,855
Loss from discontinued operations		—			(8,418		)	—			(9,388		)
Net income (loss)		$	(2,256	)	$	(5,740	)	$	9,980		$	(533	)
Basic weighted average shares outstanding		15,562			15,514			15,544			15,512
Basic net income (loss) per common share:
Net income (loss) from continuing operations		$	(0.14	)	$	0.17		$	0.64		$	0.57
Loss from discontinued operations		$	—		$	(0.54	)	$	—		$	(0.60	)
Net income (loss)		$	(0.14	)	$	(0.37	)	$	0.64		$	(0.03	)
Diluted shares outstanding
Basic weighted-average shares outstanding		15,562			15,514			15,544			15,512
Stock options		—			98			130			94
Diluted weighted-average shares outstanding		15,562			15,612			15,674			15,606
Diluted net income (loss) per common share:
Net income (loss) from continuing operations		$	(0.14	)	$	0.17		$	0.64		$	0.57
Loss from discontinued operations		$	—		$	(0.54	)	$	—		$	(0.60	)
Net income (loss)		$	(0.14	)	$	(0.37	)	$	0.64		$	(0.03	)
Potentially dilutive shares excluded from diluted-per-share amounts:
Stock options		—			50			661			50
Potentially anti-dilutive shares excluded from diluted per share amounts:
Stock options		1,379			418			202			415

 

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 non-qualified stock options and unearned performance-based options to purchase shares of common stock with exercise prices greater than the weighted-average share price during the period and shares that would be anti-dilutive to the computation of dilutive net loss per share for the three months ended September 30, 2011.

 

(8)       Comprehensive Income

 

The components of comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2011 and 2010, respectively, are as follows:

 

		Three Months Ended September 30,
		2011			2010
Net loss		$	(2,256	)	$	(5,740	)
Foreign currency translation (loss) gain		(1,735		)	8,126
Net unrealized (losses) gains on investment securities		(40		)	34
Total comprehensive income (loss)		$	(4,031	)	$	2,420

 

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		Nine Months Ended September 30,
		2011			2010
Net income (loss)		$	9,980		$	(533	)
Foreign currency translation (loss) gain		(249		)	9,699
Net unrealized (losses) gains on investment securities		(18		)	1
Total comprehensive income		$	9,713		$	9,167

 

(9)       Share-Based Compensation

 

Stock option activity for the nine months ended September 30, 2011 is as follows:

 

		Number of Shares		Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2010		859		$	9.20
Granted		630		10.84
Expired		(76	)	9.67
Exercised		(34	)	10.99
Options outstanding at September 30, 2011		1,379		9.88

 

During the nine-month period ended September 30, 2011, the Company issued options to purchase 630 shares of common stock under the 2009 Incentive Plan to the Company’s executive officers, other employees and to new members of its Board of Directors, of which 505 will not vest until certain earnings metrics have been achieved. These options were issued with a weighted-average exercise price of $10.84 per share, and a weighted-average grant date fair value of $5.13 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, 2011:

 

		2011
Expected life (in years)		3.0 to 4.0
Risk-free interest rate		0.7 to 1.2
Expected volatility		49.0 to 67.7
Dividend yield		0.0

 

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.

 

The Company’s outstanding stock options include both non-qualified stock options, which vest over differing periods ranging from the date of issuance up to 36 months from the option grant date, and 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.

 

Share-based compensation expense from non-qualified stock options for the three-month periods ended September 30, 2011 and 2010 was approximately $166 and $107, respectively; the related tax benefit was approximately $66 and $42, respectively. Share-based compensation expense from non-qualified stock options for the nine-month periods ended September 30, 2011 and 2010 was approximately $390 and $325, respectively; the related tax benefit was approximately $156 and $127, respectively. As of September 30, 2011 and December 31, 2010, the unrecognized share-based compensation expense related to the grants described above was $879 and $451, respectively.

 

The Company recorded shared-based compensation expense of $607 and a related tax benefit of approximately $240 for the three months ended September 30, 2011 for the six and eight percent operating margin performance-based stock options. The Company recorded shared-based compensation expense of $1,527 and a related tax benefit of approximately $603 for the nine months ended September 30, 2011 for the performance-based stock options that will vest upon achieving six and eight percent operating income margins as reported in four of five consecutive quarters. No share-based compensation costs for performance-based stock options were recorded for the same periods in 2010. As of September 30, 2011, the unrecognized share-based compensation expense related to these options was approximately $862. In the event that the Company achieves a ten percent operating income margin as reported in four of five consecutive quarters, the Company will recognize up to $1,200 of additional share-based compensation expense.

 

At September 30, 2011, the aggregate intrinsic value of outstanding non-qualified and performance-based stock options to purchase 1,379 shares of common stock, exercisable non-qualified and performance-based stock options to purchase 334 shares of common stock and non-qualified and performance-based stock options to purchase 772 shares of common stock that are expected

 

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to vest was $5,987, $1,753 and $3,545, respectively. At December 31, 2010, the aggregate intrinsic value of outstanding options to purchase 859 shares of common stock was $855.

 

(10)     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 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). The Company’s third reportable business segment operates under the Synergy Worldwide brand, which offers marketing plans, Distributor compensation plans and product 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 for each segment have been reduced by intercompany sales as they are not included in the measure of segment profit or loss reviewed by the chief executive officer. The Company evaluates performance based on operating income (loss) by segment before consideration of certain inter-segment transfers and expenses.

 

Reportable business segment information is as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
Net sales revenue:
Nature’s Sunshine Products:
United States		$	33,519		$	34,521		$	105,061		$	107,402
International		33,059			33,316			102,661			103,814
		66,578			67,837			207,722			211,216
Synergy Worldwide		24,524			18,259			68,035			48,813
Total net sales revenue		91,102			86,096			275,757			260,029
Operating expenses:
Nature’s Sunshine Products:
United States		31,176			32,128			95,257			102,350
International		43,151			32,658			108,852			101,279
		74,327			64,786			204,109			203,629
Synergy Worldwide		21,880			17,434			61,080			48,681
Total operating expenses		96,207			82,220			265,189			252,310
Operating income (loss):
Nature’s Sunshine Products:
United States		2,343			2,393			9,804			5,052
International		(10,092		)	658			(6,191		)	2,535
		(7,749		)	3,051			3,613			7,587
Synergy Worldwide		2,644			825			6,955			132
Total operating income (loss)		(5,105		)	3,876			10,568			7,719
Other income, net		1,204			375			1,049			2,374
Income (loss) before provision for income taxes		$	(3,901	)	$	4,251		$	11,617		$	10,093

 

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 12, Commitments and Contingencies).

 

The Company moved the reporting of its Dominican Republic market from NSP United States to NSP International during the quarter ended March 31, 2011, and has made conforming changes to the results presented above for the prior year periods. The net sales revenue and operating loss of this market for the three months ended September 30, 2010 were $690 and ($121), respectively. The net sales revenue and operating loss of this market for the nine months ended September 30, 2010 were $3,105 and ($358), respectively.

 

From an individual country perspective, only the United States comprises 10 percent or more of consolidated net sales revenue for either of the three and nine-month periods ended September 30, 2011 and 2010 as follows:

 

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		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
Net sales revenue:
United States		$	38,885		$	38,674		$	120,868		$	117,997
Other		52,217			47,422			154,889			142,032
		$	91,102		$	86,096		$	275,757		$	260,029

 

Net sales revenue by product group has not been reported as management has determined that it is impracticable to accumulate such information.

 

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, 2011			December 31, 2010
Property, plant and equipment:
United States		$	18,815		$	20,350
Venezuela		4,042			4,353
Other		2,351			2,688
Total property, plant and equipment		$	25,208		$	27,391

 

(11)     Income Taxes

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, pro forma for discrete tax items in the period in which they occur. For the three months ended September 30, 2011 and 2010, the Company’s (benefit) provision for income taxes, as a percentage of income (loss) before income taxes was (42.2) percent and 37.0 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the nine months ended September 30, 2011 and 2010, the Company’s provision for income taxes, as a percentage of income before income taxes was 14.1 percent and 12.3 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.

 

The differences between the effective tax rates and the U.S. federal statutory tax rate for the three months and nine months ended September 30, 2011 was primarily attributed to foreign deductible items, including a favorable inflation adjustment, and lower rates in foreign jurisdictions than the rates in the U.S., in addition to a decrease in recognition of previous expense related to unremitted earnings.

 

The differences between the effective rate and the U.S. federal statutory rate for the three and nine months ended September 30, 2010 were primarily attributed to net increases in tax liabilities associated with uncertain tax positions offset by deductions of certain worthless foreign stock, and also offset by utilization of foreign tax credits.

 

The Company’s U.S. federal income tax returns for 2003 through 2010 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions which have open tax years from 2000 through 2010. The Internal Revenue Service (“IRS”) is currently conducting an audit of the Company’s U.S. federal income tax returns for 2006 through 2010.

 

As of September 30, 2011, the Company had accrued $12,872 (net of $5,687 of other assets related to competent authority and royalty benefits) related to unrecognized tax positions compared with $15,679 (net of $5,687 of other assets related to competent authority and royalty benefits) as of December 31, 2010. This net decrease was primarily attributed to the expiration of the statute of limitations on certain liabilities in various foreign jurisdictions and payments made during the quarter of $2,593 related to the IRS’s audits of the Company’s U.S. federal income tax returns for 2003 through 2005, which were expensed in prior periods.

 

In October 2009, the IRS issued an examination report formally proposing adjustments with respect to the 2003 through 2005 taxable years, which primarily relate to the prices that were charged in intra-group transfers of property and the disallowance of related deductions. The Company has commenced administrative proceedings with the Office of Appeals of the Internal Revenue Service challenging the proposed adjustments. Management believes that the Company has appropriately reserved for these matters, relating to all open periods, at an amount which it believes will ultimately be due upon resolution of the administrative proceedings, and such amounts reflect management’s estimates based upon available evidence resulting from discussions with the IRS Office of Appeals. These estimates are based upon a more-likely-than-not recognition threshold. The Company is currently unable to determine the outcome of these discussions and their related impact, if any, on the Company’s financial condition, results of operations, or cash flows.

 

Although the Company believes its estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals.

 

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