Nature's Sunshine(NATR) - 2020 Q2 - Quarterly Report

Part I. Financial Information Presents the company's unaudited financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flow statements, with detailed accounting policy notes Condensed Consolidated Balance Sheets Presents the company's financial position as of June 30, 2020, and December 31, 2019, showing an increase in total assets and shareholders' equity, driven by higher cash and cash equivalents Condensed Consolidated Balance Sheets (Amounts in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $70,255 | $53,629 | | Total current assets | $134,073 | $112,705 | | Total assets | $226,929 | $213,068 | | Total current liabilities | $61,939 | $57,947 | | Total liabilities | $87,694 | $83,632 | | Total shareholders' equity | $139,235 | $129,436 | Condensed Consolidated Statements of Income Details the company's financial performance for the three and six months ended June 30, 2020, and 2019, highlighting changes in net sales, gross profit, operating income, and net income, with significant growth in net income for both periods in 2020 Condensed Consolidated Statements of Income (Three Months Ended June 30, Amounts in thousands, except per share) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $87,286 | $90,724 | | Gross profit | $64,269 | $66,859 | | Operating income | $6,600 | $4,538 | | Net income | $6,133 | $2,629 | | Net income attributable to common shareholders | $5,754 | $2,689 | | Basic earnings per share | $0.30 | $0.14 | | Diluted earnings per share | $0.29 | $0.14 | Condensed Consolidated Statements of Income (Six Months Ended June 30, Amounts in thousands, except per share) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $183,212 | $181,996 | | Gross profit | $135,514 | $134,702 | | Operating income | $13,762 | $7,516 | | Net income | $9,139 | $4,358 | | Net income attributable to common shareholders | $8,716 | $4,446 | | Basic earnings per share | $0.45 | $0.23 | | Diluted earnings per share | $0.44 | $0.23 | Condensed Consolidated Statements of Comprehensive Income Reports total comprehensive income for the three and six months ended June 30, 2020, and 2019, including net income and foreign currency translation adjustments Condensed Consolidated Statements of Comprehensive Income (Amounts in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net income | $6,133 | $2,629 | | Foreign currency translation loss (net of tax) | $(151) | $(530) | | Total comprehensive income | $5,982 | $2,099 | | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net income | $9,139 | $4,358 | | Foreign currency translation loss (net of tax) | $(260) | $(846) | | Total comprehensive income | $8,879 | $3,512 | Condensed Consolidated Statements of Changes in Shareholders' Equity Outlines changes in shareholders' equity for the six months ended June 30, 2020, and 2019, detailing movements in common stock, retained earnings, and other comprehensive loss Condensed Consolidated Statements of Changes in Shareholders' Equity (Six Months Ended June 30, Amounts in thousands) | Metric | Dec 31, 2019 | Mar 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | :--- | | Common Stock (Shares) | 19,410 | 19,470 | 19,510 | | Common Stock (Amount) | $135,741 | $135,976 | $136,661 | | Retained Earnings | $4,693 | $7,655 | $13,409 | | Noncontrolling Interest | $227 | $271 | $650 | | Accumulated Other Comprehensive Loss | $(11,225) | $(11,334) | $(11,485) | | Total Shareholders' Equity | $129,436 | $132,568 | $139,235 | Condensed Consolidated Statements of Changes in Shareholders' Equity (Six Months Ended June 30, Amounts in thousands) | Metric | Dec 31, 2018 | Mar 31, 2019 | June 30, 2019 | | :--- | :--- | :--- | :--- | | Common Stock (Shares) | 19,204 | 19,273 | 19,302 | | Common Stock (Amount) | $133,684 | $133,725 | $134,342 | | Retained Earnings | $(2,072) | $(315) | $2,374 | | Noncontrolling Interest | $63 | $35 | $(25) | | Accumulated Other Comprehensive Loss | $(11,107) | $(11,423) | $(11,953) | | Total Shareholders' Equity | $120,568 | $122,022 | $124,738 | Condensed Consolidated Statements of Cash Flows Provides a breakdown of cash flows from operating, investing, and financing activities for the six months ended June 30, 2020, and 2019, showing increased operating cash in 2020 Condensed Consolidated Statements of Cash Flows (Six Months Ended June 30, Amounts in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $14,420 | $(1,144) | | Net cash used in investing activities | $(2,210) | $(2,774) | | Net cash provided by (used in) financing activities | $5,164 | $(193) | | Effect of exchange rates on cash and cash equivalents | $(748) | $(186) | | Net increase (decrease) in cash and cash equivalents | $16,626 | $(4,297) | | Cash and cash equivalents at the end of the period | $70,255 | $46,341 | Notes to Condensed Consolidated Financial Statements Offers detailed explanations and disclosures on accounting policies, financial instruments, segment information, and other significant financial matters (1) Basis of Presentation Describes the company's business, consolidation principles, use of estimates, noncontrolling interests, and restructuring expenses, emphasizing COVID-19 impact - Nature's Sunshine Products, Inc. is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products[29] Noncontrolling Interests (in millions) | Metric | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2019 | As of June 30, 2020 | As of Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net income (loss) attributable to noncontrolling interests | $0.4 | $0.4 | $(0.1) | $(0.1) | | | | Noncontrolling interests balance | | | | | $0.7 | $0.2 | Restructuring Related Expenses (in millions) | Metric | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2019 | As of June 30, 2020 | As of Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Restructuring related expenses | $0 | $0.1 | $0.4 | $0.2 | | | | Accrued severance and restructuring related costs | | | | | $0.01 | $0.4 | Recent Accounting Pronouncements Discusses the adoption of ASU No. 2018-13 (Fair Value Measurement) and ASU No. 2019-12 (Income Taxes), with no significant expected impact - The adoption of ASU No. 2018-13, Fair Value Measurement, did not have a significant impact on the Consolidated Financial Statements[36] - The adoption of ASU No. 2019-12, Income Taxes, is not expected to have a significant impact on the Consolidated Financial Statements[37] (2) Inventories Details the composition of inventories, including raw materials, work in progress, and finished goods, showing an overall increase in total inventories Inventories Composition (Amounts in thousands) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Raw materials | $14,697 | $13,329 | | Work in progress | $1,426 | $1,288 | | Finished goods | $31,911 | $34,181 | | Total inventories | $50,166 | $46,666 | (3) Investment Securities - Trading Reports the value of trading securities and generated gains/losses for the three and six months ended June 30, 2020, and 2019 Investment Securities - Trading (Amounts in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Portfolio Total | $1,035 | $1,150 | | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Gains | $93 | $40 | | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Losses (Gains) | $(4) | $173 (gains) | (4) Revolving Credit Facility and Other Obligations Details the company's revolving credit agreement, capital credit agreement, and PPP loan, including terms, limits, and outstanding balances - The revolving credit agreement with Bank of America, N.A. was amended to extend the term to July 1, 2023, with a borrowing limit of $25.0 million and potential for additional $15.0 million. No outstanding balance as of June 30, 2020[40] - A capital credit agreement with Banc of America Leasing and Capital, LLC. has a borrowing limit of $6.0 million, maturing sixty months from the Base Date. No outstanding balance as of June 30, 2020[42][43] - The company obtained a $5.4 million loan under the Paycheck Protection Program (PPP) on April 14, 2020, maturing April 14, 2022, with a 1.00% interest rate. As of June 30, 2020, $5.4 million was outstanding, with $2.4 million classified as current[44][45] (5) Net Income Per Share Provides a reconciliation of basic and diluted net income per common share for the three and six months ended June 30, 2020, and 2019 Basic and Diluted Net Income Per Common Share (Amounts in thousands, except per share) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to common shareholders | $5,754 | $2,689 | $8,716 | $4,446 | | Basic earnings per share | $0.30 | $0.14 | $0.45 | $0.23 | | Diluted earnings per share | $0.29 | $0.14 | $0.44 | $0.23 | | Weighted average basic common shares outstanding | 19,491 | 19,291 | 19,472 | 19,280 | | Weighted average diluted common shares outstanding | 19,783 | 19,602 | 19,725 | 19,596 | (6) Capital Transactions Details share-based compensation plans, including stock options and restricted stock units (RSUs), their activity, and associated expenses Share-Based Compensation Describes the 2012 and 2009 Stock Incentive Plans, authorizing equity awards to motivate and incentivize employees and directors - The 2012 Stock Incentive Plan, adopted in 2012 and amended in 2015, authorizes a total of 3,000,000 shares of common stock for various awards[49] - The 2009 Incentive Plan allows for up to 400,000 shares from forfeited or reacquired awards to be available for grant under the 2012 Incentive Plan[50] Stock Options Provides an overview of stock option activity, including outstanding options, exercises, and aggregate intrinsic value, for the six months ended June 30, 2020 Stock Option Activity (Six Months Ended June 30, 2020, Amounts in thousands, except per share) | Metric | Number of Shares | Weighted Average Exercise Price Per Share | | :--- | :--- | :--- | | Options outstanding at December 31, 2019 | 290 | $11.49 | | Exercised | (25) | $5.79 | | Options outstanding at June 30, 2020 | 265 | $12.03 | - The aggregate intrinsic value of outstanding and exercisable stock options was $11,000 at June 30, 2020, compared to $0.1 million at December 31, 2019[53] - No unrecognized share-based compensation expense related to stock options as of June 30, 2020, and December 31, 2019[52] Restricted Stock Units Details the activity of restricted stock units (RSUs), including grants, forfeitures, and issuances, and associated compensation expense Restricted Stock Unit Activity (Six Months Ended June 30, 2020, Amounts in thousands, except per share) | Metric | Number of Shares | Weighted Average Grant Date Fair Value | | :--- | :--- | :--- | | RSUs outstanding at December 31, 2019 | 821 | $7.43 | | Granted | 686 | $5.77 | | Forfeited | (2) | $8.68 | | Issued | (114) | $9.74 | | RSUs outstanding at June 30, 2020 | 1,391 | $6.42 | Share-Based Compensation Expense for RSUs (in millions) | Period | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total RSU expense | $0.5 | $0.5 | $0.8 | $0.6 | | Performance-based RSU expense | $0.2 | $0.1 | $0.3 | $0.2 | - Unrecognized share-based compensation expense related to RSUs was $2.4 million as of June 30, 2020, expected to be recognized over a weighted average period of approximately 0.9 years[61] (7) Segment Information Provides detailed financial information by four geographic business segments, including net sales, contribution margin, and total assets - The company realigned into geographic focused operating business segments (Asia, Europe, North America, Latin America and Other) during the second quarter of 2019[67] Net Sales by Segment (Amounts in thousands) | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Asia | $32,757 | $35,162 | $63,715 | $68,758 | | Europe | $15,465 | $15,075 | $36,092 | $30,672 | | North America | $34,471 | $34,620 | $73,228 | $71,143 | | Latin America and Other | $4,593 | $5,867 | $10,177 | $11,423 | | Total net sales | $87,286 | $90,724 | $183,212 | $181,996 | Contribution Margin by Segment (Amounts in thousands) | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Asia | $16,052 | $16,677 | $30,579 | $32,402 | | Europe | $5,202 | $4,886 | $12,033 | $9,827 | | North America | $11,904 | $11,625 | $26,323 | $25,418 | | Latin America and Other | $1,946 | $2,369 | $4,396 | $4,740 | | Total contribution margin | $35,104 | $35,557 | $73,331 | $72,387 | (8) Income Taxes Discusses the provision for income taxes, effective tax rates, and factors causing differences from the U.S. federal statutory rate Provision for Income Taxes (as a percentage of income before income taxes) | Period | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes | 24.4% | 45.7% | 28.9% | 43.9% | | U.S. federal statutory rate | 21.0% | 21.0% | 21.0% | 21.0% | - The difference between the effective tax rate and the U.S. federal statutory tax rate for 2020 was primarily attributed to transfer pricing adjustments and current year foreign losses that presently do not provide future tax benefit, as well as net unfavorable foreign tax related items[77] - The decrease in the effective tax rate for the three and six months ended June 30, 2020, compared to 2019, is primarily caused by the increase in income, which lessens the impact of foreign losses and unfavorable tax adjustments[79] (9) Commitments and Contingencies Addresses legal proceedings, non-income tax contingencies, and other civil litigation, outlining potential liabilities and estimation approach - The company is party to various legal proceedings, and unfavorable rulings could have a material adverse impact on its business, financial position, results of operations, or cash flows[83] - Accrued $0.3 million for non-income tax contingencies (state sales and use tax) as of June 30, 2020, with future payments estimated to range from $0 to approximately $2.5 million[86] - Accrued $0.4 million for other litigation (value-added tax assessments and civil litigation) as of June 30, 2020, with future payments estimated to range from $0 to approximately $0.3 million[87] (10) Related Party Transactions Discloses outstanding borrowings by NSP China from the company and its joint venture partner, payable within one year at 3.0% interest NSP China Outstanding Borrowings (Amounts in millions) | Lender | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | From the Company | $6.2 | $6.1 | | From joint venture partner | $1.5 | $1.5 | (11) Fair Value Measurements Explains the fair value hierarchy and presents Level 1 fair value measurements for investment securities - trading Fair Value Measurements of Assets (Amounts in thousands) | Asset | Level 1 (June 30, 2020) | Level 1 (December 31, 2019) | | :--- | :--- | :--- | | Investment securities - trading | $1,035 | $1,150 | | Total assets measured at fair value | $1,035 | $1,150 | - The carrying amounts reflected on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and the revolving credit facility approximate fair value due to their short-term nature or variable-rate debt characteristics[94] (12) Revenue Recognition Outlines policies for revenue recognition, including net sales measurement, product returns, volume incentives, and customer loyalty programs - Revenue is recognized when the company satisfies its performance obligations by transferring promised products to the customer, typically at the shipping point when the customer obtains control[95] - Volume incentives and other sales incentives or rebates are commission payments to independent distributors, recorded as a reduction of revenue or expense, calculated monthly based on qualifying sales[98] Contract Liabilities - Customer Loyalty Programs (Six Months Ended June 30, 2020, Amounts in thousands) | Metric | Amount | | :--- | :--- | | Outstanding at December 31, 2019 | $955 | | Increase (decrease) attributed to: | | | Customer loyalty net deferrals | $3,779 | | Customer loyalty redemptions | $(3,830) | | Outstanding at June 30, 2020 | $904 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides a comprehensive analysis of the company's financial condition and results of operations, focusing on business overview, segment performance, liquidity, and critical accounting policies OVERVIEW Describes the company's direct selling business model, reliance on distributors, COVID-19 impact on sales, and reduction in SG&A expenses - The company is a natural health and wellness company engaged in manufacturing and direct selling nutritional and personal care products through a sales force of independent distributors[106] - Consolidated net sales decreased by 3.8% (2.1% in local currencies) for the second quarter of 2020 compared to 2019, primarily due to declines in Asia and Latin America, partially offset by an increase in Europe due to increased demand for nutritional supplements amid COVID-19[108][109] - Selling, general and administrative expenses decreased by $2.5 million (to 32.7% of net sales) for the three months ended June 30, 2020, primarily due to reduced travel and customer event-related costs from COVID-19 and prior restructuring efforts[110] RESULTS OF OPERATIONS Analyzes financial performance for the three and six months ended June 30, 2020, and 2019, detailing changes in sales, profit, and expenses Consolidated Operating Results Summarizes unaudited consolidated operating results for the three and six months ended June 30, 2020 and 2019, showing improved operating and net income Consolidated Operating Results (Three Months Ended June 30, Amounts in thousands) | Metric | 2020 Total | 2020 % of Net Sales | 2019 Total | 2019 % of Net Sales | Change Total | Change % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $87,286 | 100.0% | $90,724 | 100.0% | $(3,438) | (3.8)% | | Gross profit | $64,269 | 73.6% | $66,859 | 73.7% | $(2,590) | (3.9)% | | Operating income | $6,600 | 7.6% | $4,538 | 5.0% | $2,062 | 45.4% | | Net income | $6,133 | 7.0% | $2,629 | 2.9% | $3,504 | 133.3% | Consolidated Operating Results (Six Months Ended June 30, Amounts in thousands) | Metric | 2020 Total | 2020 % of Net Sales | 2019 Total | 2019 % of Net Sales | Change Total | Change % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $183,212 | 100.0% | $181,996 | 100.0% | $1,216 | 0.7% | | Gross profit | $135,514 | 74.0% | $134,702 | 74.0% | $812 | 0.6% | | Operating income | $13,762 | 7.5% | $7,516 | 4.1% | $6,246 | 83.1% | | Net income | $9,139 | 5.0% | $4,358 | 2.4% | $4,781 | 109.7% | Net Sales Analyzes net sales performance by operating segment, highlighting foreign currency fluctuations and market trends Net Sales by Operating Segment (Three Months Ended June 30, Amounts in thousands) | Segment | 2020 | 2019 | Percent Change | Impact of Currency Exchange | Percent Change Excluding Impact of Currency | | :--- | :--- | :--- | :--- | :--- | :--- | | Asia | $32,757 | $35,162 | (6.8)% | $(872) | (4.4)% | | Europe | $15,465 | $15,075 | 2.6% | $(232) | 4.1% | | North America | $34,471 | $34,620 | (0.4)% | $(92) | (0.2)% | | Latin America and Other | $4,593 | $5,867 | (21.7)% | $(311) | (16.4)% | | Total | $87,286 | $90,724 | (3.8)% | $(1,507) | (2.1)% | Net Sales by Operating Segment (Six Months Ended June 30, Amounts in thousands) | Segment | 2020 | 2019 | Percent Change | Impact of Currency Exchange | Percent Change Excluding Impact of Currency | | :--- | :--- | :--- | :--- | :--- | :--- | | Asia | $63,715 | $68,758 | (7.3)% | $(1,954) | (4.5)% | | Europe | $36,092 | $30,672 | 17.7% | $(429) | 19.1% | | North America | $73,228 | $71,143 | 2.9% | $(115) | 3.1% | | Latin America and Other | $10,177 | $11,423 | (10.9)% | $(414) | (7.3)% | | Total | $183,212 | $181,996 | 0.7% | $(2,912) | 2.3% | - Consolidated net sales for the three months ended June 30, 2020, decreased 3.8% (2.1% in local currencies) primarily due to declines in Asia and Latin America, partially offset by growth in Europe[116] - For the six months, consolidated net sales increased 0.7% (2.3% in local currencies) driven by Europe and North America, offset by declines in Asia and Latin America[117] Cost of Sales Reports a modest increase in cost of sales as a percentage of net sales for the three and six months ended June 30, 2020, due to market mix Cost of Sales as a Percent of Net Sales | Period | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Cost of sales % of net sales | 26.4% | 26.0% | 26.3% | 26.0% | - The modest increase in cost of sales percentage is due to unfavorable changes in market mix, among other factors[128] Volume Incentives Discusses the decrease in volume incentives expense as a percentage of net sales, driven by market mix changes and NSP China growth Volume Incentives as a Percent of Net Sales | Period | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | | Volume incentives % of net sales | 33.4% | 33.9% | 34.5% | 34.2% | - The decrease in volume incentives as a percentage of net sales for the six months ended June 30, 2020, is primarily due to changes in market mix, reflecting growth in markets where volume incentives as a percentage of net sales are lower than the consolidated average, and the growth in NSP China[129] Selling, General and Administrative Reports a decrease in SG&A expenses for the three and six months ended June 30, 2020, due to restructuring and cost reductions Selling, General and Administrative Expenses (Amounts in millions) | Period | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | | SG&A expenses | $28.5 | $59.6 | $31.0 | $64.9 | | SG&A % of net sales | 32.7% | 32.5% | 34.2% | 35.6% | - The decrease in selling, general and administrative expenses was primarily related to a reduction of headcount in the U.S. and Latin America as a result of restructuring, decrease in travel and event related costs, and other cost reductions, net of any incremental costs associated with COVID-19[131] Other Income (Loss), Net Details other income (loss), net, for the three and six months ended June 30, 2020, primarily from foreign exchange gains and losses Other Income (Loss), Net (Amounts in millions) | Period | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | | Other income (loss), net | $1.5 (gain) | $(0.9) (loss) | $0.3 (gain) | $0.3 (gain) | - Other income (loss), net, primarily consisted of foreign exchange gains and losses as a result of net changes in foreign currencies, primarily in Asia, Europe, and Latin America[132] Income Taxes Explains the provision for income taxes and effective tax rates, noting the impact of increased income on foreign losses and tax adjustments Provision for Income Taxes (as a percentage of income before income taxes) | Period | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes | 24.4% | 45.7% | 28.9% | 43.9% | | U.S. federal statutory rate | 21.0% | 21.0% | 21.0% | 21.0% | - The difference between the effective tax rate for the three and six months ended June 30, 2020, compared to June 30, 2019, is primarily caused by the increase in income, which causes items such as foreign losses and unfavorable tax adjustments to have a lesser impact on the effective tax rate[136] Product Categories Describes the company's diverse product lines, including general health, immune, cardiovascular, and weight management, mostly manufactured in Utah - The company offers over 700 products across several classifications, including general health, immune, cardiovascular, digestive, personal care, and weight management[138] - Most products are manufactured at the company's facility in Spanish Fork, Utah, with some produced by contract manufacturers under stringent quality control procedures[138] Distribution and Marketing Explains the direct selling model through independent distributors, their compensation structure, and distribution logistics - Independent distributors (Managers and Distributors) market products through direct selling, motivated by high-quality products, support, training, sales conventions, travel programs, and financial incentives[140] - Products in the United States are shipped from manufacturing and warehouse facilities in Spanish Fork, Utah, and regional warehouses, while international operations utilize local warehouse facilities or third-party distributors[141] - Sales commissions, or 'volume incentives,' are paid to independent Managers and Distributors based on their product sales and their sales organization's sales, except in NSP China, where independent service fees are paid[144] Distributor Information Provides statistics on total and active independent Managers, Distributors, and customers by segment, emphasizing their productivity for revenue growth - Revenue is highly dependent upon the number and productivity of independent Managers and Distributors, with growth in sales volume requiring an increase in productivity and/or total numbers[145] Total Managers, Distributors and Customers by Segment (as of June 30, in thousands) | Segment | 2020 Distributors & Customers | 2020 Managers | 2019 Distributors & Customers | 2019 Managers | | :--- | :--- | :--- | :--- | :--- | | Asia | 87.4 | 2.9 | 87.5 | 3.0 | | Europe | 199.8 | 4.9 | 174.8 | 4.0 | | North America | 160.4 | 4.7 | 162.8 | 4.7 | | Latin America and Other | 66.6 | 1.2 | 64.1 | 1.2 | | Total | 514.2 | 13.7 | 489.2 | 12.9 | Active Distributors and Customers by Segment (as of June 30, in thousands) | Segment | 2020 Distributors & Customers | 2020 Managers | 2019 Distributors & Customers | 2019 Managers | | :--- | :--- | :--- | :--- | :--- | | Asia | 34.5 | 2.9 | 38.3 | 3.0 | | Europe | 88.8 | 4.9 | 85.2 | 4.0 | | North America | 76.7 | 4.7 | 78.4 | 4.7 | | Latin America and Other | 24.1 | 1.2 | 30.1 | 1.2 | | Total | 224.1 | 13.7 | 232.0 | 12.9 | LIQUIDITY AND CAPITAL RESOURCES Discusses working capital, cash position, and cash flow activities, including credit facilities and the PPP loan, noting improved operating cash flows Working Capital and Cash (Amounts in millions) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Working capital | $72.1 | $54.8 | | Cash and cash equivalents | $70.3 | $53.6 | | U.S. cash | $24.4 | | | Foreign cash | $45.9 | | Net Consolidated Cash Inflows (Outflows) (Six Months Ended June 30, Amounts in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Operating activities | $14,420 | $(1,144) | | Investing activities | $(2,210) | $(2,774) | | Financing activities | $5,164 | $(193) | - Operating cash flows provided $14.4 million for the six months ended June 30, 2020, compared to using $1.1 million in the same period in 2019, primarily due to efforts to reduce operating costs and increase profitability and working capital[160] - Financing activities provided $5.2 million for the six months ended June 30, 2020, primarily due to proceeds from the $5.4 million Paycheck Protection Program (PPP) loan[162][167] - The company believes that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund normal operating needs, including capital expenditures, on both a short- and long-term basis, assuming COVID-19 disruptions are minimized[169] OFF-BALANCE SHEET ARRANGEMENTS The company reports having no off-balance sheet arrangements as of June 30, 2020 - The company has no off-balance sheet arrangements[171] CRITICAL ACCOUNTING POLICIES AND ESTIMATES Discusses key accounting policies and estimates requiring significant management judgment, affecting financial position and results of operations - Critical accounting policies and estimates include revenue recognition, inventories, incentive trip accruals, contingencies (legal and non-income tax), and income taxes[175][176][177][178][179] - The preparation of financial statements requires management to make estimates and assumptions based on historical experience and current/expected economic conditions, which could materially differ from actual results[173] Item 3. Quantitative and Qualitative Disclosures about Market Risk Highlights exposure to market risks from currency exchange rates, interest rates, and international social, political, and economic conditions - Net sales, operating income, and net income are affected by fluctuations in currency exchange rates, interest rates, and other uncertainties inherent in doing business and selling products in multiple currencies and international markets[183] Item 4. Controls and Procedures States that disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were evaluated and concluded to be effective as of June 30, 2020, at the reasonable assurance level[184] - There were no material changes in the company's internal controls over financial reporting during the quarter ended June 30, 2020[185] Part II. Other Information Presents other required information, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings The company reports no legal proceedings - The company has no legal proceedings to report[188] Item 1A. Risk Factors Discusses risks including the COVID-19 pandemic, cybersecurity threats, manufacturing risks, changes to distributor compensation, and PPP Loan uncertainties - The ongoing COVID-19 pandemic poses significant risks, including disruption of global financial markets, reduced ability to access capital, operational halts, and limitations on independent distributors' ability to sell products[190][191] - Cybersecurity risks and failure to maintain data integrity could expose the company to data loss, litigation, liability, and reputational damage, especially with remote work and third-party partners[192][194][195] - Manufacturing activity is subject to risks such as catastrophic loss at facilities, supply chain disruptions, non-compliance with FDA GMPs, and defects from contract manufacturers[196][197][198] - Changes to independent distributor compensation plans, such as those announced in May 2020, could result in unintended negative economic and non-economic consequences, including higher costs or difficulty attracting and retaining distributors[199] - The company may not be entitled to forgiveness of its $5.4 million PPP Loan, and its application could be deemed impermissible, leading to penalties, reputational damage, or significant resource consumption[200][201][202] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or use of proceeds for the period - The company has no unregistered sales of equity securities or use of proceeds to report[203] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities for the period - The company has no defaults upon senior securities to report[203] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[204] Item 5. Other Information The company reports no other information for the period - The company has no other information to report[205] Item 6. Exhibits Lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer Index to Exhibits | Item No. | Exhibit | | :--- | :--- | | 31.1(1) | Certification of Chief Executive Officer under SEC Rule 13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934 | | 31.2(1) | Certificate of Chief Financial Officer under SEC Rule 13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934 | | 32.1(1) | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | | 32.2(1) | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | | 101.INS | XBRL Instance Document | | 101.SCH | XBRL Taxonomy Extension Schema Document | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |