NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
We are a natural health and wellness company primarily engaged in the manufacture and sale of nutritional and personal care products. We are a Utah corporation with our principal place of business in Lehi, Utah, and sell our products to a sales force of independent consultants who use the products themselves or resell them to consumers.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation of our financial information as of September 30, 2021, and for the three and nine-month periods ended September 30, 2021 and 2020. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2021.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 as amended by Form 10-K/A on July 9, 2021.
Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities, in these financial statements and accompanying notes. Actual results could differ from these estimates due to the uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors and those differences could have a material effect on our financial position and results of operations.
The significant accounting estimates inherent in the preparation of our financial statements include estimates associated with our determination of liabilities related to independent consultant incentives, the determination of income tax assets and liabilities, certain other non-income tax and value-added tax contingencies, and legal contingencies. In addition, significant estimates form the basis for allowances with respect to inventory valuations. Various assumptions and other factors enter into the determination of these significant estimates. The process of determining significant estimates takes into account historical experience and current and expected economic conditions.
Noncontrolling Interests
Noncontrolling interests changed as a result of the net income attributable to noncontrolling interests of $0.6 million and $1.0 million for the three and nine months ended September 30, 2021, respectively. Net income attributable to the noncontrolling interests was $0.4 million and $0.8 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021 and December 31, 2020, noncontrolling interests were $2.8 million and $1.8 million, respectively.
Restructuring Related Accruals and Expenses
We recorded $0 and $48,000 of restructuring related expenses during the three and nine months ended September 30, 2021, respectively. We recorded $0 and $0.1 million of restructuring related expenses during the three and nine months ended September 30, 2020, respectively. Accrued severance and restructuring related costs were $0 and $0.4 million as of September 30, 2021 and December 31, 2020, respectively.
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. The amendments in this update are effective for reporting periods beginning after December 15, 2020. The adoption of this ASU did not have a significant impact on our Consolidated Financial Statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This could affect balances of right of use assets, lease liabilities, and notes payables. The amendments in this update are effective as of March 12, 2020 through December 21, 2022. The adoption of this ASU is not expected to have a significant impact on our Consolidated Financial Statements.
(2) Inventories
The composition of inventories is as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Raw materials
|
$
|
19,603
|
|
|
$
|
13,956
|
|
Work in progress
|
1,619
|
|
|
1,351
|
|
Finished goods
|
36,154
|
|
|
32,376
|
|
Total inventories
|
$
|
57,376
|
|
|
$
|
47,683
|
|
(3) Investment Securities - Trading
Our trading securities portfolio totaled $1.0 million at September 30, 2021, and $1.0 million at December 31, 2020, and generated losses of $4,000 and gains of $45,000 for the three months ended September 30, 2021 and 2020, respectively, and gains of $62,000 and gains of $41,000 for the nine months ended September 30, 2021 and 2020, respectively.
(4) Revolving Credit Facility and Other Obligations
On July 11, 2017, we entered into a revolving credit agreement with Bank of America, N.A., with a borrowing limit of $25.0 million (the “Credit Agreement”). On June 11, 2020 the credit agreement was amended to extend the term to mature on July 1, 2023. The amendment also allows for additional borrowings of $15.0 million or up to three separate increases of no less than $5.0 million each. On March 8, 2021, we signed an amendment to the credit agreement that eliminates the Index floor from the calculation of interest. We pay interest on any borrowings under the Credit Agreement, which through March 8, 2021, was at LIBOR, or the Index floor of 0.75 percent, plus 2.25 percent (3.00 percent as of December 31, 2020), and an annual commitment fee of 0.25 percent on the unused portion of the commitment. Interest under the amended Credit Agreement is at LIBOR, plus 2.25 percent (2.33 percent as of September 30, 2021), and an annual commitment fee of 0.25 percent on the unused portion of the commitment. We are required to settle our net borrowings under the Credit Agreement only upon maturity, and as a result, have classified prior outstanding borrowings as non-current on our condensed consolidated balance sheet. At September 30, 2021, there was no outstanding balance under the Credit Agreement.
The Credit Agreement contains customary financial covenants, including financial covenants relating to our solvency and leverage. In addition, the Credit Agreement restricts certain capital expenditures, lease expenditures, other indebtedness, liens on assets, guarantees, loans and advances, dividends, mergers, consolidations and transfers of assets except as permitted in the Credit Agreement. The Credit Agreement is collateralized by our manufacturing facility, accounts receivable, inventories and other assets. As of September 30, 2021, we were in compliance with the debt covenants set forth in the Credit Agreement.
On April 21, 2020, we entered into a credit agreement with Banc of America Leasing and Capital, LLC, with a borrowing limit of $6.0 million (the "Capital Credit Agreement"). On November 19, 2020, we executed on the Capital Credit Agreement and borrowed $3.7 million. We currently do not expect to make any additional borrowings under the Capital Credit Agreement. We pay interest on any borrowings under the Capital Credit Agreement at a fixed rate of 3.00 percent and are
required to settle our borrowings under the Capital Credit Agreement in 36 monthly payments, of $0.1 million. The Capital Credit Agreement is collateralized by any new equipment purchased under the agreement. As of September 30, 2021, there was $2.7 million outstanding balance under the Capital Credit Agreement, of which $1.2 million was classified as current.
(5) Net Income Per Share
Basic net income per common share (“Basic EPS”), is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share.
Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and nine months ended September 30, 2021 and 2020 (dollar and share amounts in thousands, except for per share information):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
$
|
4,858
|
|
|
$
|
6,755
|
|
|
$
|
15,414
|
|
|
$
|
15,471
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
19,894
|
|
|
19,533
|
|
|
19,896
|
|
|
19,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to common shareholders
|
$
|
0.24
|
|
|
$
|
0.35
|
|
|
$
|
0.77
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding:
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
19,894
|
|
|
19,533
|
|
|
19,896
|
|
|
19,493
|
|
Stock-based awards
|
481
|
|
|
326
|
|
|
396
|
|
|
327
|
|
Diluted weighted-average shares outstanding
|
20,375
|
|
|
19,859
|
|
|
20,292
|
|
|
19,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to common shareholders
|
$
|
0.24
|
|
|
$
|
0.34
|
|
|
$
|
0.76
|
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
Dilutive shares excluded from diluted-per-share amounts:
|
|
|
|
|
|
|
|
Stock options
|
460
|
|
|
791
|
|
|
460
|
|
|
791
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from diluted-per-share amounts:
|
|
|
|
|
|
|
|
Stock options
|
—
|
|
|
199
|
|
|
—
|
|
|
199
|
|
Potentially dilutive shares excluded from diluted-per-share amounts include performance-based options to purchase shares of common stock for which certain earnings metrics have not been achieved. Potentially anti-dilutive shares excluded from diluted-per-share amounts include both non-qualified stock options and unearned performance-based options to purchase shares of common stock with exercise prices greater than the weighted- average share price during the period and shares that would be anti-dilutive to the computation of diluted net income per share for each of the periods presented.
(6) Capital Transactions
Dividends
On March 10, 2021, we announced a special non-recurring cash dividend of $1.00 per common share in an aggregate amount of $19.9 million that was paid on April 5, 2021, to shareholders of record on March 29, 2021. In accordance with the provisions of our 2012 Stock Incentive Plan (the "2012 Incentive Plan"), as a result of the special dividend we are required to make the participant's original grant whole by preventing either dilution or enlargement of the benefits or potential benefits intended by the original grant. The 2012 Incentive Plan provides our Compensation Committee with the discretion to meet this requirement. See further discussion in the Share-Based Compensation section of this Note.
The declaration of future dividends is subject to the discretion of our Board of Directors and will depend upon various factors, including our earnings, financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.
Share Repurchase Program
On March 10, 2021, we announced a $15.0 million common share repurchase program. The repurchases may be made from time to time as market conditions warrant and are subject to regulatory considerations. At September 30, 2021, the remaining balance available for repurchases under the program was $9.0 million.
Share-Based Compensation
During the year ended December 31, 2012, our shareholders adopted and approved the Nature’s Sunshine Products, Inc. 2012 Stock Incentive Plan. The 2012 Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and other stock-based awards. The Compensation Committee of the Board of Directors has authority and discretion to determine the type of award, as well as the amount, terms and conditions of each award under the 2012 Incentive Plan, subject to the limitations of the 2012 Incentive Plan. A total of 1,500,000 shares of our common stock were originally authorized for the granting of awards under the 2012 Incentive Plan. In 2015, our shareholders approved an amendment to the 2012 Incentive Plan, to increase the number of shares of common stock reserved for issuance by 1,500,000 shares. On May 5, 2021, our shareholders approved the Amended and Restated 2012 Stock Incentive Plan, which among other amendments, increased the number of shares of common stock reserved for issuance by 2,000,000 shares. The number of shares available for awards, as well as the terms of outstanding awards, are subject to adjustment as provided in the Amended and Restated 2012 Incentive Plan for stock splits, stock dividends, recapitalizations and other similar events.
We have also maintained a stock incentive plan, which was approved by shareholders in 2009 (the “2009 Incentive Plan"), which 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. As of September 30, 2021, there were no outstanding awards under the 2009 Incentive Plan.
Stock Options
Our outstanding stock options include time-based stock options, which vest over differing periods of time ranging from the date of issuance to up to 48 months from the option grant date, and performance-based stock options, which have already vested upon achieving operating income margins of six, eight and ten percent as reported in four of five consecutive quarters over the term of the options.
Stock option activity for the nine-month period ended September 30, 2021, is as follows (amounts in thousands, except per share information):
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|
|
|
|
|
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|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Exercise
Price Per Share
|
|
Weighted Average
Grant Date
Fair Value
|
Options outstanding at December 31, 2020
|
226
|
|
|
$
|
12.10
|
|
|
$
|
5.42
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited or canceled
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
(53)
|
|
|
12.00
|
|
|
6.61
|
|
Options outstanding at September 30, 2021
|
173
|
|
|
$
|
12.13
|
|
|
$
|
5.05
|
|
There was no share-based compensation expense for the three- and nine-month periods ended September 30, 2021 and 2020. As of September 30, 2021 and December 31, 2020, there was no unrecognized share-based compensation expense related to the grants described above.
As a result of the special dividend, we issued 4,300 shares to outstanding option holders as dividend equivalents in order to keep the participant's original grant whole. Because this modification was required under the provisions of our stock incentive plans, no additional share-based compensation expense was recorded.
At September 30, 2021, the aggregate intrinsic value of outstanding and exercisable stock options to purchase 173,000 shares of common stock was $0.5 million. At December 31, 2020, the aggregate intrinsic value of outstanding and exercisable options to purchase 226,000 shares of common stock was $0.7 million.
For the nine-month periods ended September 30, 2021 and 2020, we issued 53,000 and 41,000 shares of common stock upon the exercise of stock options at an average exercise price of $12.00 and $7.92 per share, respectively. The aggregate intrinsic value of options exercised during the nine-month periods ended September 30, 2021 and 2020, was $0.4 million and $0.1 million, respectively. For the nine-month periods ended September 30, 2021 and 2020, the Company recognized $0.2 million and $0.1 million of tax benefits from the exercise of stock options, respectively.
As of September 30, 2021 and December 31, 2020, we did not have any unvested performance-based stock options outstanding.
Restricted Stock Units
Our outstanding restricted stock units (“RSUs”), include time-based RSUs, which vest over differing periods of time ranging from 12 months to up to 36 months from the RSU grant date, as well as performance-based RSUs, which vest upon achieving targets relating to revenue and earnings growth, earnings-per-share, and/or stock price levels. RSUs granted to members of the Board of Directors contain a restriction period in which the shares are not issued until two years after vesting. At September 30, 2021 and December 31, 2020, there were 94,000 and 82,000 vested RSUs, respectively, granted to the Board of Directors with an accompanying restriction period.
Restricted stock unit activity for the nine-month period ended September 30, 2021, is as follows (amounts in thousands, except per share information):
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|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Restricted Stock Units outstanding at December 31, 2020
|
1,179
|
|
|
$
|
6.18
|
|
Granted
|
306
|
|
|
13.48
|
|
Forfeited
|
(94)
|
|
|
6.91
|
|
Issued
|
(519)
|
|
|
6.38
|
|
Restricted Stock Units outstanding at September 30, 2021
|
872
|
|
|
8.55
|
|
During the nine-month period ended September 30, 2021, we granted 306,000 RSUs under the 2012 Incentive Plan to the Board of Directors, executive officers and other employees, which were comprised of both time-based RSUs and share-priced performance-based RSUs. The time-based RSUs were issued with a weighted-average grant date fair value of $18.05 per share and vest in annual installments over a three-year period from the grant date. The share-priced performance-based RSUs were issued with a weighted-average grant date fair value of $13.87 per share and vest upon achieving share-priced targets over a three-year period from the grant date.
Except for share-priced performance RSUs, RSUs are valued at market value on the date of grant, which is the grant date share price discounted for expected dividend payments during the vesting period. For RSUs with post-vesting restrictions, a Finnerty Model was utilized to calculate a valuation discount from the market value of common shares reflecting the restriction embedded in the RSUs preventing the sale of the underlying shares over a certain period of time. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model discount for lack of marketability is approximately 12.7 percent for a common share.
Share-price performance-based RSUs were estimated using the Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. Our assumptions include a performance period of three years, expected volatility of between 50.0 percent and 54.70 percent, and a range of risk-free rates between 0.3 percent and 2.9 percent.
Share-based compensation expense for RSUs for the three-month periods ended September 30, 2021 and 2020, was approximately $0.6 million and $0.5 million, respectively. Share-based compensation expense from RSUs for the nine-month periods ended September 30, 2021 and 2020, was approximately $1.6 million and $1.4 million, respectively. As of September 30, 2021 and December 31, 2020, the unrecognized share-based compensation expense related to the grants described above, excluding incentive awards discussed below, was $2.0 million and $1.3 million, respectively. The remaining compensation expense is expected to be recognized over the weighted average period of approximately 0.8 years.
Share-based compensation expense related to performance-based RSUs for the three-month periods ended September 30, 2021 and 2020, was $0.3 million and $0.5 million, respectively. Share-based compensation expense related to performance-based RSUs for the nine-month periods ended September 30, 2021 and 2020, was $1.2 million and $0.8 million, respectively. Should we attain all of the metrics related to performance-based RSU grants, we would, and expect to, recognize up to $1.8 million of potential share-based compensation expense.
As a result of the special dividend, we issued 22,000 time-based RSUs and 26,200 performance-based RSUs that mirror the original grant time and performance-based vesting targets and requirements as dividend equivalents in order to keep the participant's original grant whole. These awards are included in the granted share total in the table above. Because this modification was required under the provisions of our stock incentive plans, no additional share-based compensation expense was recorded.
The number of shares issued upon vesting of RSUs granted pursuant to our share-based compensation plans is net of the minimum statutory withholding requirements that we pay on behalf of our employees, which was 150,000 and 41,000 shares for the nine-month periods ended September 30, 2021 and 2020, respectively. Although shares withheld are not issued, they are treated as common share repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the repurchase program described above.
(7) Segment Information
We have four business segments (Asia, Europe, North America, and Latin America and Other) based primarily upon the geographic region where each segment operates, as well as the internal organization of our officers and their responsibilities. Each of the geographic segments operate under the Nature’s Sunshine Products and Synergy® WorldWide brands. The Latin America and Other segment includes our wholesale business in which we sell products to various locally-managed entities independent of the Company that we have granted distribution rights for the relevant market.
Net sales for each segment have been reduced by intercompany sales as they are not included in the measure of segment profit or loss reviewed by the chief executive officer. We evaluate performance based on contribution margin by segment before consideration of certain inter-segment transfers and expenses.
Reportable business segment information is as follows (dollar amounts in thousands):
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|
|
|
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|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net sales:
|
|
|
|
|
|
|
|
Asia
|
$
|
48,417
|
|
|
$
|
38,099
|
|
|
$
|
127,708
|
|
|
$
|
101,814
|
|
Europe
|
21,813
|
|
|
18,006
|
|
|
65,468
|
|
|
54,098
|
|
North America
|
37,738
|
|
|
37,557
|
|
|
112,872
|
|
|
110,785
|
|
Latin America and Other
|
6,778
|
|
|
6,588
|
|
|
20,097
|
|
|
16,765
|
|
Total net sales
|
114,746
|
|
|
100,250
|
|
|
326,145
|
|
|
283,462
|
|
|
|
|
|
|
|
|
|
Contribution margin (1):
|
|
|
|
|
|
|
|
Asia
|
21,421
|
|
|
17,981
|
|
|
55,203
|
|
|
48,560
|
|
Europe
|
6,959
|
|
|
5,954
|
|
|
20,343
|
|
|
17,987
|
|
North America
|
17,193
|
|
|
12,065
|
|
|
48,892
|
|
|
38,388
|
|
Latin America and Other
|
3,961
|
|
|
2,765
|
|
|
11,355
|
|
|
7,161
|
|
Total contribution margin
|
49,534
|
|
|
38,765
|
|
|
135,793
|
|
|
112,096
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (2)
|
39,528
|
|
|
33,294
|
|
|
108,666
|
|
|
92,863
|
|
Operating income
|
10,006
|
|
|
5,471
|
|
|
27,127
|
|
|
19,233
|
|
|
|
|
|
|
|
|
|
Other income (loss), net
|
(886)
|
|
|
671
|
|
|
(2,290)
|
|
|
(230)
|
|
Income before provision for income taxes
|
$
|
9,120
|
|
|
$
|
6,142
|
|
|
$
|
24,837
|
|
|
$
|
19,003
|
|
_________________________________________
(1) Contribution margin consists of net sales less cost of sales and volume incentives expense.
(2) Service fees in China totaled $5.2 million and $11.7 million for the three and nine-month periods ended September 30, 2021, respectively, compared to $3.2 million and $8.0 million for the three and nine-month periods ended September 30, 2020. These service fees are included in selling, general and administrative expenses.
From an individual country perspective, the United States and South Korea comprise 10 percent or more of consolidated net sales for the three and nine-month periods ended September 30, 2021 and 2020, as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net sales:
|
|
|
|
|
|
|
|
United States
|
$
|
34,960
|
|
|
$
|
35,062
|
|
|
$
|
104,258
|
|
|
$
|
103,048
|
|
South Korea
|
15,985
|
|
|
16,592
|
|
|
48,340
|
|
|
47,447
|
|
Other
|
63,801
|
|
|
48,596
|
|
|
173,547
|
|
|
132,967
|
|
|
$
|
114,746
|
|
|
$
|
100,250
|
|
|
$
|
326,145
|
|
|
$
|
283,462
|
|
Net sales generated by each of our product lines is set forth below (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Asia
|
|
|
|
|
|
|
|
General health
|
$
|
13,150
|
|
|
$
|
10,055
|
|
|
$
|
37,140
|
|
|
$
|
27,364
|
|
Immune
|
463
|
|
|
85
|
|
|
1,048
|
|
|
465
|
|
Cardiovascular
|
13,018
|
|
|
10,622
|
|
|
35,181
|
|
|
29,284
|
|
Digestive
|
10,427
|
|
|
9,935
|
|
|
25,045
|
|
|
24,482
|
|
Personal care
|
4,201
|
|
|
2,575
|
|
|
12,015
|
|
|
7,457
|
|
Weight management
|
7,158
|
|
|
4,827
|
|
|
17,279
|
|
|
12,762
|
|
|
48,417
|
|
|
38,099
|
|
|
127,708
|
|
|
101,814
|
|
Europe
|
|
|
|
|
|
|
|
General health
|
$
|
9,308
|
|
|
$
|
7,725
|
|
|
$
|
28,447
|
|
|
$
|
22,501
|
|
Immune
|
2,285
|
|
|
1,510
|
|
|
6,119
|
|
|
5,324
|
|
Cardiovascular
|
2,774
|
|
|
2,581
|
|
|
8,602
|
|
|
7,693
|
|
Digestive
|
5,700
|
|
|
4,541
|
|
|
16,807
|
|
|
13,254
|
|
Personal care
|
1,167
|
|
|
1,023
|
|
|
3,592
|
|
|
3,492
|
|
Weight management
|
579
|
|
|
626
|
|
|
1,901
|
|
|
1,834
|
|
|
21,813
|
|
|
18,006
|
|
|
65,468
|
|
|
54,098
|
|
North America
|
|
|
|
|
|
|
|
General health
|
$
|
16,573
|
|
|
$
|
15,839
|
|
|
$
|
49,192
|
|
|
$
|
46,190
|
|
Immune
|
5,056
|
|
|
5,790
|
|
|
14,031
|
|
|
18,637
|
|
Cardiovascular
|
4,171
|
|
|
4,138
|
|
|
12,406
|
|
|
11,984
|
|
Digestive
|
9,079
|
|
|
8,635
|
|
|
28,558
|
|
|
24,734
|
|
Personal care
|
1,978
|
|
|
1,963
|
|
|
5,631
|
|
|
5,867
|
|
Weight management
|
881
|
|
|
1,192
|
|
|
3,054
|
|
|
3,373
|
|
|
37,738
|
|
|
37,557
|
|
|
112,872
|
|
|
110,785
|
|
Latin America and Other
|
|
|
|
|
|
|
|
General health
|
$
|
1,959
|
|
|
$
|
2,038
|
|
|
$
|
5,807
|
|
|
$
|
5,002
|
|
Immune
|
806
|
|
|
837
|
|
|
2,314
|
|
|
2,326
|
|
Cardiovascular
|
448
|
|
|
429
|
|
|
1,351
|
|
|
1,070
|
|
Digestive
|
2,941
|
|
|
2,682
|
|
|
8,813
|
|
|
7,008
|
|
Personal care
|
406
|
|
|
384
|
|
|
1,149
|
|
|
848
|
|
Weight management
|
218
|
|
|
218
|
|
|
663
|
|
|
511
|
|
|
6,778
|
|
|
6,588
|
|
|
20,097
|
|
|
16,765
|
|
|
$
|
114,746
|
|
|
$
|
100,250
|
|
|
$
|
326,145
|
|
|
$
|
283,462
|
|
From an individual country perspective, only the United States comprised 10 percent or more of consolidated property, plant and equipment as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Property, plant and equipment:
|
|
|
|
United States
|
$
|
48,176
|
|
|
$
|
50,025
|
|
Other
|
4,362
|
|
|
4,330
|
|
Total property, plant and equipment, net
|
$
|
52,538
|
|
|
$
|
54,355
|
|
Total assets per segment is set forth below (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Assets:
|
|
|
|
Asia
|
$
|
96,522
|
|
|
$
|
82,572
|
|
Europe
|
17,931
|
|
|
16,398
|
|
North America
|
117,215
|
|
|
142,324
|
|
Latin America and Other
|
8,084
|
|
|
8,204
|
|
Total assets
|
$
|
239,752
|
|
|
$
|
249,498
|
|
(8) Income Taxes
For the three months ended September 30, 2021 and 2020, our provision (benefit) for income taxes, as a percentage of income before income taxes was 40.2 percent and (16.7) percent, respectively, compared with a U.S. federal statutory rate of 21.0 percent. For the nine months ended September 30, 2021 and 2020, our provision for income taxes, as a percentage of income before income taxes was 34.0 percent and 14.2 percent, respectively, compared with a U.S. federal statutory rate of 21.0 percent.
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three and nine months ended September 30, 2021, was primarily attributed to an increase in tax liability associated with transfer pricing adjustments, non-deductible executive compensation, and net unfavorable foreign tax related items, partially offset by favorable deductions for stock compensation.
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended September 30, 2020, was primarily attributed to a decrease in tax liability associated with uncertain tax positions and release of valuation allowance for deferred tax assets expected to be utilized in the prior year. The difference between the effective tax rate and the U.S. federal statutory tax rate for the nine months ended September 30, 2020, was primarily attributed to a decrease in tax liability associated with uncertain tax positions and release of valuation allowance for deferred tax assets expected to be utilized in the prior year, partially offset by transfer pricing adjustments and foreign losses during that period that were not expected to provide future tax benefit, as well as net unfavorable foreign tax related items.
The difference between the effective tax rate for the three and nine months ended September 30, 2021 compared to September 30, 2020 is primarily caused by an increase in the current period tax liability associated with transfer pricing adjustments and non-deductible executive compensation, partially offset by favorable deductions for stock compensation in the current period, as well as decreases in prior period uncertain tax positions and valuation allowances which did not repeat in the current period.
As the U.S. Department of the Treasury is working on finalizing Treasury Regulations with respect to the Tax Cuts and Jobs Act (Tax Reform Act), future changes could likewise affect recorded deferred tax assets and liabilities in later periods. Management is not aware of any such additional changes that would have a material effect on our results of operations, cash flows or financial position.
Our U.S. federal income tax returns for 2017 through 2020 are open to examination for federal tax purposes. We have several foreign tax jurisdictions with open tax years from 2014 through 2020.
As of September 30, 2021 and December 31, 2020, we have accrued $5,000 and $0.1 million, respectively, related to unrecognized tax positions.
Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. Although we believe our tax estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and operating results in the period in which we make such determination.
(9) Commitments and Contingencies
Legal Proceedings
We are party to various legal proceedings and disputes. Management cannot predict the ultimate outcome of these matters, individually or in the aggregate, or their resulting effect on our business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on our business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. We maintain product liability, general liability and excess liability insurance coverage. However, insurance may not continue to be available at an acceptable cost to us, such coverage may not be sufficient to cover one or more large claims, or the insurers may successfully disclaim coverage as to a pending or future claim.
Non-Income Tax Contingencies
We have reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. We provide provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters, including value-added taxes and sales tax. We provide provisions for U.S. state sales taxes in each of the states where we have nexus. As of September 30, 2021 and December 31, 2020, accrued liabilities were $0.2 million and $0.2 million, respectively, related to non-income tax contingencies. While we believe that the assumptions and estimates used to determine contingent liabilities are reasonable, the ultimate outcome of these matters cannot presently be determined. We believe future payments related to these matters could range from $0 to approximately $2.5 million.
Other Litigation
We are a party to various other legal proceedings and disputes in the United States and foreign jurisdictions. As of September 30, 2021 and December 31, 2020, accrued liabilities were $0.5 million, respectively, related to the estimated outcome of these proceedings. In addition, we are a party to other litigation where there is a reasonable possibility that a loss may be incurred, but either the losses are not considered to be probable or we cannot at this time estimate the loss, if any; therefore, no provision for losses has been provided. We believe future payments related to these matters could range from $0 to approximately $0.3 million.
(10) Related Party Transactions
During the three and nine months ended September 30, 2021 and 2020, our joint venture in China, owned 80 percent by us and 20 percent by a wholly owned subsidiary of Fosun Pharma, did not borrow any amounts from the Company or our joint venture partner. As of September 30, 2021 and December 31, 2020 outstanding borrowings by NSP China from the Company were $2.4 million and $4.8 million, respectively. As of September 30, 2021 and December 31, 2020 outstanding borrowings by NSP China from our joint venture partner were $0.6 million and $1.2 million, respectively. These notes are payable in less than one year and bear interest of 3.0 percent. The notes between NSP China and the Company eliminate in consolidation.
(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.
The following table presents our hierarchy for our assets, measured at fair value on a recurring basis, as of September 30, 2021 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total
|
Investment securities - trading
|
$
|
950
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
950
|
|
Total assets measured at fair value on a recurring basis
|
$
|
950
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
950
|
|
The following table presents our hierarchy for our assets, measured at fair value on a recurring basis, as of December 31, 2020 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities - trading
|
$
|
989
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
989
|
|
Total assets measured at fair value on a recurring basis
|
$
|
989
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
989
|
|
Investment securities - trading — Our trading portfolio consists of various marketable securities that are valued using quoted prices in active markets.
For the nine months ended September 30, 2021, and for the year ended December 31, 2020, there were no fair value measurements using significant other observable inputs (Level 2) or significant unobservable inputs (Level 3).
The carrying amounts reflected on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. The carrying value of our debt approximates fair value due to its recent acquisition and short maturity. During the nine months ended September 30, 2021 and 2020, we did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.
(12) Revenue Recognition
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for product returns and any related sales incentives or rebates based upon historical information and current trends. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with revenue recognized at shipping point, the point in time the customer obtains control of the products. The majority of our contracts have a single performance obligation and are short term in nature. Contracts with multiple performance obligations are insignificant. Sales taxes and value-added taxes in the United States and foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Amounts received for unshipped merchandise are recorded as deferred revenue. Amounts for membership fees are deferred and amortized as revenue over the life of the membership, primarily one year.
A reserve for product returns is recorded based upon historical experience and current trends. We allow independent consultants to return the unused portion of products within ninety days of purchase if they are not satisfied with the product. In some of our markets, the requirements to return product are more restrictive.
From time to time, our U.S. operations extend short-term credit associated with product promotions. In addition, for certain of our international operations, we offer credit terms consistent with industry standards within the country of operation.
Volume incentives and other sales incentives or rebates are a significant part of our direct sales marketing program and represent commission payments made to independent consultants. These payments are designed to provide incentives for reaching higher sales levels. The amount of volume incentive expense recognized is determined based upon the amount of qualifying purchases in a given month and recorded as volume incentive expense. Payments to independent consultants for
sales incentives or rebates related to their own purchases are recorded as a reduction of revenue. Some payments for sales incentives are processed daily; while others, including rebates, are calculated monthly based upon qualifying sales.
Contract Liabilities - Customer Loyalty Programs
Historically, we have offered loyalty point programs which allowed customers to earn loyalty points on personal orders. Loyalty points were recorded as contract liabilities in deferred revenue. These programs were accounted for as a reduction in the transaction price and generally recognized as points that were redeemed for additional products. During the year ended December 31, 2020 these programs were discontinued. As of September 30, 2021, there were no outstanding loyalty points.
Disaggregation of Revenue
Our products are grouped into six principal categories: general health, immune, cardiovascular, digestive, personal care and weight management. We have four business segments that are based primarily upon the geographic region where each segment operates. Each of the geographic segments operate under the Nature’s Sunshine Products and Synergy® WorldWide brands. See Note 7, Segment Information, for further information on our reportable segments and presentation of disaggregated revenue by reportable segment and product category.
Practical Expedients and Exemptions
We have made the accounting policy election to treat shipping and handling as a fulfillment activity rather than a promised service under Topic 606.
We generally expense volume incentives when incurred because the amortization period would have been one year or less.
All of our contracts with customers have a duration of less than one year. The value of any unsatisfied performance obligations is insignificant.