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NATR > SEC Filings for NATR > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for NATURES SUNSHINE PRODUCTS INC


6-Nov-2012

Quarterly Report


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

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

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

OVERVIEW

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

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

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

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

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

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


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RESULTS OF OPERATIONS



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



                                2012                    2011                  Change from
                         Total     Percent of    Total     Percent of         2012 to 2011
                        dollars    net sales    dollars    net sales      Dollar     Percentage
Net sales revenue       $ 91,232        100.0 % $ 91,102        100.0 %  $     130          0.1 %

Costs and expenses:
Cost of goods sold        17,713         19.4     16,879         18.5          834          4.9
Volume incentives         33,155         36.3     32,733         35.9          422          1.3
SG&A expenses             31,659         34.7     31,845         35.0         (186 )       (0.6 )
Contract termination
costs                          -          0.0     14,750         16.2      (14,750 )     (100.0 )
Total operating
expenses                  82,527         90.4     96,207        105.6      (13,680 )      (14.2 )
Operating income
(loss)                     8,705          9.6     (5,105 )       (5.6 )     13,810        270.5
Other income
(expense), net              (214 )       (0.3 )    1,204          1.3       (1,418 )     (117.8 )
Income (loss) before
provision for income
taxes                      8,491          9.3     (3,901 )       (4.3 )     12,392        317.7
Provision (benefit)
for income taxes           2,121          2.3     (1,645 )       (1.8 )      3,766        228.9
Net income (loss)       $  6,370          7.0 % $ (2,256 )       (2.5 )% $   8,626        382.4 %

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

                                 2012                     2011                 Change from
                          Total     Percent of     Total     Percent of       2012 to 2011
                         dollars    net sales     dollars    net sales     Dollar    Percentage
Net sales revenue       $ 277,091        100.0 % $ 275,757        100.0 % $  1,334          0.5 %

Costs and expenses:
Cost of goods sold         53,159         19.2      52,560         19.1        599          1.1
Volume incentives         100,276         36.2     100,421         36.4       (145 )       (0.1 )
SG&A expenses              95,466         34.4      97,458         35.3     (1,992 )       (2.0 )
Contract termination
costs                           -          0.0      14,750          5.4    (14,750 )     (100.0 )
Total operating
expenses                  248,901         89.8     265,189         96.2    (16,288 )       (6.1 )
Operating income           28,190         10.2      10,568          3.8     17,622        166.7
Other income
(expense), net               (159 )       (0.1 )     1,049          0.4     (1,208 )     (115.2 )
Income before
provision for income
taxes                      28,031         10.1      11,617          4.2     16,414        141.3
Provision for income
taxes                       7,147          2.6       1,637          0.6      5,510        336.6
Net income              $  20,884          7.5 % $   9,980          3.6 % $ 10,904        109.3 %

Net Sales Revenue

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


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NSP United States

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

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

NSP International

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

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

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

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

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

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


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Synergy WorldWide

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

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

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

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

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

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

Cost of Goods Sold

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

Volume Incentives

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


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Selling, General and Administrative

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

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

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

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

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

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

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

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

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

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

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

Contract Termination Costs

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

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

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

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

Operating Income (Loss)

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

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

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


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

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

Other Income (Expense), Net

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

Income Taxes

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the periods in which they occur. For the three months ended September 30, 2012 . . .

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