SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
| For the Quarterly Period Ended June 30, 2002 |
Commission File Number 0-8707 |
NATURE'S SUNSHINE PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
| Utah (State or other jurisdiction of incorporation or organization) |
87-0327982 (IRS Employer Identification No.) |
75 East 1700 South
Provo, Utah 84606
(Address of principal executive offices and zip code)
(801) 342-4300
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
The number of shares of Common Stock, no par value, outstanding on July 30, 2002 was 15,809,991 shares.
NATURE'S SUNSHINE PRODUCTS, INC.
FORM 10-Q
For the Quarter Ended June 30, 2002
Table of Contents
Part I. |
Financial Information |
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Item 1. |
Unaudited Financial Statements |
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Condensed Consolidated Balance Sheets |
3 |
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Condensed Consolidated Statements of Income and Comprehensive Income |
5 |
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Condensed Consolidated Statements of Cash Flows |
7 |
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Notes to Condensed Consolidated Financial Statements |
8 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
13 |
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Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
18 |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
19 |
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Part II. |
Other Information |
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Item 6. |
Exhibits and Reports on Form 8-K |
20 |
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2
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
(Unaudited)
| |
June 30, 2002 |
December 31, 2001 |
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|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 25,391 | $ | 29,788 | ||||
| Accounts receivable, net | 6,533 | 6,327 | ||||||
| Inventories | 28,028 | 26,834 | ||||||
| Deferred income tax assets | 2,828 | 1,188 | ||||||
| Prepaid expenses and other | 8,773 | 9,209 | ||||||
| Total Current Assets | 71,553 | 73,346 | ||||||
| PROPERTY, PLANT AND EQUIPMENT, net | 33,992 | 35,294 | ||||||
| LONG-TERM INVESTMENTS | 10,694 | 12,973 | ||||||
| INTANGIBLE ASSETS, net | 4,060 | 4,753 | ||||||
| OTHER ASSETS, net | 5,153 | 5,062 | ||||||
| $ | 125,452 | $ | 131,428 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts in Thousands)
(Unaudited)
| |
June 30, 2002 |
December 31, 2001 |
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|---|---|---|---|---|---|---|---|---|---|
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
| CURRENT LIABILITIES: | |||||||||
| Accounts payable | $ | 3,942 | $ | 4,814 | |||||
| Accrued volume incentives | 10,613 | 12,005 | |||||||
| Accrued liabilities | 15,848 | 11,978 | |||||||
| Income taxes payable | 3,100 | 3,988 | |||||||
| Total Current Liabilities | 33,503 | 32,785 | |||||||
| LONG-TERM LIABILITIES: | |||||||||
| Deferred income tax liabilities | 637 | 1,220 | |||||||
| Deferred compensation | 1,563 | 1,625 | |||||||
| Total Long-Term Liabilities | 2,200 | 2,845 | |||||||
| SHAREHOLDERS' EQUITY: | |||||||||
| Common stock, no par value; 20,000 shares authorized, 19,446 shares issued | 34,865 | 36,308 | |||||||
| Retained earnings | 117,889 | 116,836 | |||||||
| Treasury stock, at cost, 3,560 and 3,180 shares, respectively | (46,813 | ) | (43,538 | ) | |||||
| Accumulated other comprehensive loss | (16,192 | ) | (13,808 | ) | |||||
| Total Shareholders' Equity | 89,749 | 95,798 | |||||||
| $ | 125,452 | $ | 131,428 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per-Share Information)
(Unaudited)
| |
Three Months Ended June 30, |
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|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
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| SALES REVENUE | $ | 77,920 | $ | 81,760 | ||||
| COSTS AND EXPENSES: | ||||||||
| Cost of goods sold | 13,704 | 14,655 | ||||||
| Volume incentives | 34,430 | 35,929 | ||||||
| Selling, general and administrative | 25,912 | 24,395 | ||||||
| 74,046 | 74,979 | |||||||
| OPERATING INCOME | 3,874 | 6,781 | ||||||
| OTHER EXPENSE | 1,434 | 695 | ||||||
| INCOME BEFORE PROVISION FOR INCOME TAXES | 5,308 | 7,476 | ||||||
| PROVISION FOR INCOME TAXES | 2,289 | 2,780 | ||||||
| NET INCOME | 3,019 | 4,696 | ||||||
| OTHER COMPREHENSIVE INCOME (LOSS), net of tax: | ||||||||
| Foreign currency translation adjustments | (2,286 | ) | 234 | |||||
| Net unrealized holding gains (losses) on marketable securities | (87 | ) | 22 | |||||
| Reclassification adjustment for losses included in net income | 34 | (13 | ) | |||||
| (2,339 | ) | 243 | ||||||
| COMPREHENSIVE INCOME | $ | 680 | $ | 4,939 | ||||
| BASIC NET INCOME PER COMMON SHARE | $ | 0.19 | $ | 0.29 | ||||
| WEIGHTED AVERAGE BASIC COMMON SHARES | 16,088 | 16,258 | ||||||
| DILUTED NET INCOME PER COMMON SHARE | $ | 0.18 | $ | 0.28 | ||||
| WEIGHTED AVERAGE DILUTED COMMON SHARES | 16,701 | 16,710 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Amounts in Thousands, Except Per-Share Information)
(Unaudited)
| |
Six Months Ended June 30, |
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|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
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| SALES REVENUE | $ | 153,780 | $ | 163,454 | ||||
| COSTS AND EXPENSES: | ||||||||
| Cost of goods sold | 27,319 | 29,268 | ||||||
| Volume incentives | 67,805 | 72,212 | ||||||
| Selling, general and administrative | 52,999 | 48,788 | ||||||
| 148,123 | 150,268 | |||||||
| OPERATING INCOME | 5,657 | 13,186 | ||||||
| OTHER INCOME (EXPENSE) | ||||||||
| Impairment of investment | (3,000 | ) | — | |||||
| Other income, net | 2,162 | 654 | ||||||
| (838 | ) | 654 | ||||||
| INCOME BEFORE PROVISION FOR INCOME TAXES | 4,819 | 13,840 | ||||||
| PROVISION FOR INCOME TAXES | 2,688 | 5,122 | ||||||
| NET INCOME | 2,131 | 8,718 | ||||||
| OTHER COMPREHENSIVE INCOME (LOSS), net of tax: | ||||||||
| Foreign currency translation adjustments | (3,216 | ) | (772 | ) | ||||
| Net unrealized holding gains (losses) on marketable securities | (627 | ) | 24 | |||||
| Reclassification adjustment for losses included in net income | 1,459 | (13 | ) | |||||
| (2,384 | ) | (761 | ) | |||||
| COMPREHENSIVE INCOME (LOSS) | $ | (253 | ) | $ | 7,957 | |||
| BASIC NET INCOME PER COMMON SHARE | $ | 0.13 | $ | 0.54 | ||||
| WEIGHTED AVERAGE BASIC COMMON SHARES | 16,175 | 16,273 | ||||||
| DILUTED NET INCOME PER COMMON SHARE | $ | 0.13 | $ | 0.53 | ||||
| WEIGHTED AVERAGE DILUTED COMMON SHARES | 16,902 | 16,524 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Amounts in Thousands)
(Unaudited)
| |
Six Months Ended June 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 2,131 | $ | 8,718 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 4,391 | 3,249 | |||||||||
| Tax benefit from stock option exercises | 289 | 48 | |||||||||
| Loss on sale of property, plant and equipment | 108 | 14 | |||||||||
| Deferred income taxes | (2,223 | ) | (1,804 | ) | |||||||
| Deferred compensation | (62 | ) | 252 | ||||||||
| Loss on impaired investment | 3,000 | — | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | (206 | ) | 593 | ||||||||
| Inventories | (1,194 | ) | (1,155 | ) | |||||||
| Prepaid expenses and other assets | 523 | 599 | |||||||||
| Accounts payable | (872 | ) | 1,892 | ||||||||
| Accrued volume incentives | (1,392 | ) | 1,593 | ||||||||
| Accrued liabilities | 3,870 | 1,969 | |||||||||
| Income taxes payable | (888 | ) | 592 | ||||||||
| Cumulative currency translation adjustments | (3,578 | ) | (333 | ) | |||||||
| Net Cash Provided by Operating Activities | 3,897 | 16,227 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures | (2,572 | ) | (9,807 | ) | |||||||
| Proceeds from (purchase of) long-term investments, net | 110 | (1,100 | ) | ||||||||
| Payments received (advances) on long-term receivables | (111 | ) | 112 | ||||||||
| Purchase of other assets | (71 | ) | (440 | ) | |||||||
| Proceeds from sale of property, plant and equipment | 74 | 59 | |||||||||
| Net Cash Used in Investing Activities | (2,570 | ) | (11,176 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Payment of cash dividends | (1,077 | ) | (1,084 | ) | |||||||
| Purchase of treasury stock | (6,010 | ) | (1,300 | ) | |||||||
| Repayments of short-term debt | — | (273 | ) | ||||||||
| Proceeds from exercise of stock options | 1,001 | 237 | |||||||||
| Net Cash Used in Financing Activities | (6,086 | ) | (2,420 | ) | |||||||
| EFFECT OF EXCHANGE RATES ON CASH | 362 | (439 | ) | ||||||||
| NET INCREASE (DECREASE) IN CASH AND | |||||||||||
| CASH EQUIVALENTS | (4,397 | ) | 2,192 | ||||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD | 29,788 | 28,803 | |||||||||
| CASH AND CASH EQUIVALENTS AT END OF THE PERIOD | $ | 25,391 | $ | 30,995 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Per-Share Information)
(Unaudited)
(1) INTERIM FINANCIAL STATEMENT POLICIES AND DISCLOSURES
The unaudited, condensed consolidated financial statements of Nature's Sunshine Products, Inc. and subsidiaries included herein have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally required in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes the following disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements reflect all adjustments, which in the opinion of management are necessary to present fairly the financial position as of June 30, 2002, and the results of operations and cash flows for the periods presented. All of the adjustments which have been made in these condensed consolidated financial statements are of a normal recurring nature. Operating results for the three and six months ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
The Company suggests 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, 2001.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting and broadens the criteria for recording identifiable intangible assets separate from goodwill and amounts previously recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for goodwill and indefinite-lived intangibles, and instead these assets are reviewed for impairment on a periodic basis as appropriate. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001, were adopted by the Company on January 1, 2002.
In connection with the adoption of SFAS No. 142, the Company reassessed the useful lives and classification of its intangible assets. The Company determined that $3,213 of previously identified goodwill should be classified as an acquired distributor network and continues to be amortized over a 10-year period. The Company has determined that none of its intangible assets are impaired. Because all of the Company's intangible assets continue to be amortized over the same useful lives, there is no
8
impact on operations. Therefore, no reconciliation of reported net income to adjusted net income is presented. Information regarding the Company's intangible assets is as follows:
| |
As of June 30, 2002 |
As of December 31, 2001 |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Carrying Amount |
Accumulated Amortization |
Net |
Carrying Amount |
Accumulated Amortization |
Net |
|||||||||||||
| Patents and Trademarks | $ | 1,202 | $ | 943 | $ | 259 | $ | 1,202 | $ | 829 | $ | 373 | |||||||
| Acquired Distributor Networks | 5,634 | 2,107 | 3,527 | 5,634 | 1,674 | 3,960 | |||||||||||||
| Product Registrations | 706 | 432 | 274 | 773 | 353 | 420 | |||||||||||||
| Total | $ | 7,542 | $ | 3,482 | $ | 4,060 | $ | 7,609 | $ | 2,856 | $ | 4,753 | |||||||
Amortization expense for intangible assets for the six months ended June 30, 2002, was $626. Estimated amortization expense for the remainder of 2002 and the five succeeding fiscal years follows:
| |
Estimated Amortization Expense |
||
|---|---|---|---|
| 2002 (remainder) | $ | 652 | |
| 2003 | 1,118 | ||
| 2004 | 525 | ||
| 2005 | 303 | ||
| 2006 | 301 | ||
| 2007 | 300 | ||
(3) INVENTORIES
Inventories consist of the following:
| |
June 30, 2002 |
December 31, 2001 |
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|---|---|---|---|---|---|---|
| Raw materials | $ | 7,557 | $ | 6,571 | ||
| Work in process | 948 | 928 | ||||
| Finished goods | 19,523 | 19,335 | ||||
| $ | 28,028 | $ | 26,834 | |||
(4) NET INCOME PER COMMON SHARE
Basic net income per common share (Basic EPS) excludes dilution and 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.
As of June 30, 2002, the Company had a total of 3,765 common stock options outstanding. These options were granted at fair market value and have a weighted-average exercise price of $8.18 per share.
9
Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three months ended June 30, 2002 and 2001:
| |
Net Income (Numerator) |
Shares (Denominator) |
Per Share Amount |
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|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended June 30, 2002 | ||||||||||
| Basic EPS | $ | 3,019 | 16,088 | $ | 0.19 | |||||
| Effect of stock options | — | 613 | (0.01 | ) | ||||||
| Diluted EPS | $ | 3,019 | 16,701 | $ | 0.18 | |||||
| Three Months Ended June 30, 2001 | ||||||||||
| Basic EPS | $ | 4,696 | 16,258 | $ | 0.29 | |||||
| Effect of stock options | — | 452 | (0.01 | ) | ||||||
| Diluted EPS | $ | 4,696 | 16,710 | $ | 0.28 | |||||
| Six Months Ended June 30, 2002 | ||||||||||
| Basic EPS | $ | 2,131 | 16,175 | $ | 0.13 | |||||
| Effect of stock options | — | 727 | — | |||||||
| Diluted EPS | $ | 2,131 | 16,902 | $ | 0.13 | |||||
| Six Months Ended June 30, 2001 | ||||||||||
| Basic EPS | $ | 8,718 | 16,273 | $ | 0.54 | |||||
| Effect of stock options | — | 251 | (0.01 | ) | ||||||
| Diluted EPS | $ | 8,718 | 16,524 | $ | 0.53 | |||||
For the three months ended June 30, 2002 and 2001, there were outstanding options to purchase 259 and 623 shares of common stock, respectively, that were not included in the computation of Diluted EPS, as their effect would have been anti-dilutive. For the six months ended June 30, 2002 and 2001, there were outstanding options to purchase 230 and 866 shares of common stock, respectively, that were not included in the computation of Diluted EPS, as their effect would have been anti-dilutive.
(5) EQUITY TRANSACTIONS
The Company has declared consecutive quarterly cash dividends since 1988. The most recent quarterly cash dividend of 31/3 cents per common share was declared on July 29, 2002, to shareholders of record on August 9, 2002, and is payable on August 16, 2002.
For the three and six months ended June 30, 2002, the Company repurchased approximately 352 and 521 shares of its common stock at an average price per share of $11.01 and $11.55, respectively, as part of its 1,000-share buyback program authorized by the Company's Board of Directors in February 2001. At July 29, 2002, the Company had 251 shares remaining to be purchased under the current buyback program.
10
(6) ACCUMULATED OTHER COMPREHENSIVE LOSS
The composition of accumulated other comprehensive loss, net of tax, is as follows:
| |
Foreign Currency Adjustments |
Unrealized Gains (Losses) on Available-for Sale Securities |
Total Accumulated Other Comprehensive Loss |
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|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of December 31, 2001 | $ | (13,158 | ) | $ | (650 | ) | $ | (13,808 | ) | |
| Current period change | (3,216 | ) | 832 | (2,384 | ) | |||||
| Balance as of June 30, 2002 | $ | (16,374 | ) | $ | 182 | $ | (16,192 | ) | ||
(7) SEGMENT INFORMATION
The Company has four operating segments. These operating segments are components of the Company for which separate information is available that is evaluated regularly by management in deciding how to allocate resources and assess performance. The Company evaluates performance based on operating income.
The Company's operating segments are based on geographic operations. Intersegment sales are eliminated in consolidation and are not material.
11
Operating segment information for the three and six months ended June 30, 2002 and 2001, is as follows:
| |
Three Months Ended June 30, |
Six Months Ended June 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2002 |
2001 |
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| Sales Revenue: | ||||||||||||||
| United States | $ | 45,344 | $ | 45,635 | $ | 89,495 | $ | 91,679 | ||||||
| International: | ||||||||||||||
| Latin America | 16,848 | 19,142 | 32,602 | 39,006 | ||||||||||
| Asia Pacific | ||||||||||||||