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NATR > SEC Filings for NATR > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for NATURES SUNSHINE PRODUCTS INC


9-May-2013

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, 2012, and our Reports on Form 8-K filed since the date of such Form 10-K.

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 and Distributors 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 three business segments that are divided based on the different characteristics of their Distributor bases, marketing and Distributor compensation plans and product formulations, as well as the internal organization of our officers and their responsibilities and business operations. Two business segments operate under the Nature's Sunshine Products brand (NSP Americas, Asia Pacific and Europe and NSP Russia, Central and Eastern Europe), and one operates under the Synergy WorldWide brand.

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 Argentina, Australia, Chile, Israel, New Zealand and Norway.

During the first quarter of 2013, we experienced an increase in our consolidated net sales of 3.9 percent compared to the first quarter of 2012 (or 4.2 percent in local currencies). Synergy WorldWide net sales increased approximately 16.5 percent compared to the same period in 2012 (or 16.7 percent in local currencies). NSP Americas, Asia Pacific and Europe net sales decreased approximately 1.5 percent compared to the same period in 2012 (or 1.0 percent in local currencies). NSP Russia, Central and Eastern Europe net sales increased approximately 3.5 percent compared to the same period in 2012. Our most significant sales revenue growth was from our Synergy businesses in Europe and Korea. Gains in these markets were partially offset by decreases in other markets, principally NSP Canada, NSP Japan, NSP Peru and Synergy North America.

Over the same period, selling, general and administrative expense as a percentage of net sales revenue for the quarter increased from 28.4 percent in the prior year to 31.2 percent in the current year as a result of increased U.S. compensation costs and severance costs associated to the resignation of our previous CEO.

We distribute our products to consumers through an independent sales force comprised of independent Managers and Distributors, some of whom also consume products. Typically a person who joins our independent sales force begins as a Distributor. A Distributor may earn Manager status by committing more time and effort to selling our products, recruiting productive Distributors and attaining certain product sales levels. On a worldwide basis, active Managers were approximately


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18,200 and 19,000 at March 31, 2013 and 2012, respectively, and active Distributors and customers worldwide were approximately 341,200 and 349,100 at March 31, 2013 and 2012, respectively.

Net sales revenue represents net sales including shipping and handling revenues offset by volume rebates given to Managers, Distributors and customers. Volume rebates as a percentage of retail sales may vary by country depending upon regulatory restrictions that limit or otherwise restrict rebates. We also offer reduced volume rebates with respect to certain products and promotions worldwide.

Our international operations have provided and are expected to continue to provide a significant portion of our total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we also compare the percentage change in net sales from one period to another period by excluding the effects of foreign currency exchange as shown below. Net sales excluding the impact of foreign exchange fluctuations is not a U.S. GAAP financial measure. Net sales in local currency removes from net sales in U.S. dollars the impact of changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period. We believe presenting the impact of foreign currency fluctuations is useful to investors because it allows a more meaningful comparison of net sales of our foreign operations from period to period. However, net sales excluding the impact of foreign currency fluctuations should not be considered in isolation or as an alternative to net sales in U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP.

Our gross profit consists of net sales less cost of sales, which represents our manufacturing costs, the price we pay to our raw material suppliers and manufacturers of our products, and duties and tariffs, as well as shipping and handling costs related to product shipments.

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.

Selling, general and administrative expenses represent our operating expenses, components of which include labor and benefits, sales events, professional fees, travel and entertainment, Distributor marketing, occupancy costs, communication costs, bank fees, depreciation and amortization, and other miscellaneous operating expenses.

Most of our sales to Distributors outside the United States are made in the respective local currencies. In preparing our financial statements, we translate revenues into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from our suppliers generally are made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate transaction losses on intercompany transactions. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. See Item 3. Quantitative and Qualitative Disclosures about Market Risk.


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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 March 31, 2013 and 2012 (dollar amounts in thousands).

                              2013                     2012                    Change
                       Total     Percent of     Total     Percent of     Total
                      dollars    net sales     dollars    net sales     dollars    Percentage
Net sales revenue     $ 96,479        100.0 %  $ 92,868        100.0 %  $  3,611          3.9 %
Cost of sales          (24,445 )      (25.3 )   (23,729 )      (25.6 )      (716 )       (3.0 )
                        72,034         74.7      69,139         74.4       2,895          4.2

Volume incentives       34,975         36.3      33,581         36.1       1,394          4.2
SG&A expenses           30,117         31.2      26,384         28.4       3,733         14.1
Operating income         6,942          7.2       9,174          9.9      (2,232 )      (24.3 )
Other income
(loss), net                330          0.3        (110 )       (0.1 )       440        400.0
Income before
provision for
income taxes             7,272          7.5       9,064          9.8      (1,792 )      (19.8 )
Provision for
income taxes             2,408          2.5       1,836          2.0         572         31.2
Net income            $  4,864          5.0 %  $  7,228          7.8 %  $ (2,364 )      (32.7 )%

Net Sales Revenue



The following table summarizes the changes in our net sales revenue by operating
segment for the three months ended March 31, 2013 and 2012.



                                           Net Sales Revenue by Operating Segment
                                                                                    Percent
                                                                                    Change
                                                                     Impact of     Excluding
                                                        Percent      Currency      Impact of
                                  2013        2012       Change      Exchange      Currency

NSP Americas, Asia Pacific
and Europe:
NSP North America               $ 39,504    $ 39,466         0.1 %  $       (21 )        0.1 %
NSP Latin America                 11,890      11,860         0.3           (103 )        1.1
NSP Asia Pacific and Europe        1,743       2,609       (33.2 )         (151 )      (27.4 )
                                  53,137      53,935        (1.5 )         (275 )       (1.0 )

NSP Russia, Central and
Eastern Europe                  $ 16,140    $ 15,590         3.5 %  $         4          3.5 %

Synergy WorldWide:
Synergy North America           $  4,190    $  4,902       (14.5 )% $         -        (14.5 )%
Synergy Asia Pacific              14,143      11,400        24.1           (108 )       25.0
Synergy Europe                     8,869       7,041        26.0             70         25.0
                                  27,202      23,343        16.5            (38 )       16.7

                                $ 96,479    $ 92,868         3.9 %  $      (309 )        4.2 %

Consolidated net sales revenue for the three months ended March 31, 2013 was $96.5 million compared to $92.9 million for the same period in 2012, an increase of approximately 3.9 percent. We experienced a $0.3 million unfavorable impact in foreign currency exchange rate fluctuations in 2013, and our consolidated net sales revenue would have increased by 4.2 percent from 2012 excluding the negative impact. The increase in net sales revenue for the three months ended March 31, 2013 compared to the same period in 2012 is primarily due to an increase of net sales in our NSP Russia, Central and Eastern Europe and Synergy WorldWide segments and was partially offset by a decline of net sales in our NSP Americas, Asia Pacific and Europe segment.


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NSP Americas, Asia Pacific and Europe

Net sales revenue related to NSP Americas, Asia Pacific and Europe for the three months ended March 31, 2013 was $53.1 million compared to $53.9 million for the same period in 2012, a decrease of 1.5 percent. In local currency, net sales decreased 1.0 percent, compared to the same period in 2012. Fluctuations in foreign exchange rates had a $0.3 million unfavorable impact on net sales for the three months ended March 31, 2013. Active Managers within NSP Americas, Asia Pacific and Europe totaled approximately 9,100 and 10,200 at March 31, 2013 and 2012, respectively. Active Distributors and customers within NSP Americas, Asia Pacific and Europe totaled approximately 157,300 and 169,200 at March 31, 2013 and 2012, respectively. Managers and Distributors within NSP Americas, Asia Pacific and Europe are predominantly practitioners of nutritional supplement therapies and retailers and consumers of our products. Segment net sales revenue and the number of Distributors and customers decreased primarily due to lower recruiting in the NSP Canada, Japan and Mexico markets and were partially offset by increased activity in the NSP Venezuela market. Active Managers includes independent Managers under our various compensation plans that have achieved and maintained certain product sales levels. As such, all Managers are considered to be active Managers. Active Distributors and customers includes our independent Distributors and customers who have purchased products directly from the Company for resale and/or personal consumption during the previous three months ended.

Notable activity in the following markets contributed to the results of NSP Americas, Asia Pacific and Europe:

The United States market includes both English and Spanish language sales divisions, of which the English language division is approximately 80 percent of net sales revenue. Our English language division net sales revenue increased $0.3 million for the three months ended March 31, 2013, or 1.2 percent, compared to the same period in 2012. Our Spanish language division net sales revenue decreased $0.2 million, or 2.8 percent, for the three months ended March 31, 2013, compared to the same period in 2012. Our sales to Managers, Distributors and customers have stabilized during the quarter. We are continuing our efforts to drive growth through investment in sales and marketing personnel, training, the launch of new products (e.g. our new weight management line), sales programs and incentive programs.

In Venezuela, net sales revenues increased approximately $0.6 million, or 36.3 percent, for the three months ended March 31, 2013, compared to the same period in 2012. In local currency, net sales increased 46.8 percent, compared to the same period in 2012. Fluctuations in foreign exchange rates had a $0.2 million unfavorable impact on net sales for the three months ended March 31, 2013. The increase in net sales is due to an increased Manager and Distributor base.

In Japan, net sales revenues decreased approximately $0.7 million, or 46.1 percent, for the three months ended March 31, 2013, compared to the same period in 2012. In local currency, net sales decreased 37.3 percent, compared to the same period in 2012. Fluctuations in foreign exchange rates had a $0.1 million unfavorable impact on net sales for the three months ended March 31, 2013. The decrease in net sales is primarily due to the continued lower activity in our existing Manager and Distributor base. We continue in our efforts to stabilize the business and have adjusted expenses in line with current sales levels.

In Canada, net sales revenues decreased approximately $0.3 million, or 7.7 percent, for the three months ended March 31, 2013, compared to the same period in 2012. Fluctuations in foreign exchange rates had a nominally unfavorable impact on net sales for the three months ended March 31, 2013. The decrease in net sales is primarily due to lower member activity as the result of fewer sales promotions that were held quarter over quarter. In Canada, we have launched several incentives to return to growth and increase profitability, including the appointment of a new sales director, the launch of new products and back office efficiencies.

In Mexico, net sales revenues decreased approximately $0.1 million, or 1.9 percent, for the three months ended March 31, 2013, compared to the same period in 2012. In local currency, net sales decreased 4.6 percent, compared to the same period in 2012. Fluctuations in foreign exchange rates had a $0.1 million favorable impact on net sales for the three months ended March 31, 2013. The decrease in net sales is due to lower Manager and Distributor activity. In addition to the local sales and marketing team having been strengthened in late 2012, we have also appointed a new General Manager for the market effective April 1st, 2013. We have plans to launch new products into the market, and to increase the efficiency and effectiveness of distribution to our Distributors and customers later in 2013.

NSP Russia, Central and Eastern Europe

Net sales revenue related to NSP Russia, Central and Eastern Europe markets (primarily Russia, the Ukraine, and Belarus) for the three months ended March 31, 2013 was $16.1 million compared to $15.6 million for the same period in 2012, an increase of 3.5 percent. Fluctuations in foreign exchange rates had a nominally favorable impact on net sales for the three months ended March 31, 2013 by making our products more affordable. Our Russia market continues its momentum with a second consecutive quarter of year-over-year growth, the result of improved Manager and Distributor recruiting efforts and Distributor engagement. Active Managers within NSP Russia, Central and Eastern Europe totaled approximately 6,000 and 5,900 at March 31, 2013 and 2012, respectively. Active Distributors and customers within NSP Russia, Central and Eastern Europe totaled approximately 130,000 and 127,000 at March 31, 2013 and 2012, respectively. NSP


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Russia, Central and Eastern Europe's business model is more oriented to a network marketing approach when compared to those of NSP Americas, Asia Pacific and Europe. This growth has been driven and supported by the enhanced focus and attention afforded by the organizational realignment during 2012.

Synergy WorldWide

Net sales revenue related to Synergy WorldWide for the three months ended March 31, 2013 was $27.2 million, compared to $23.3 million for the same period in 2012, an increase of 16.5 percent. In local currency, net sales increased 16.7 percent, compared to the same period in 2012. Fluctuations in foreign exchange rates had a slight unfavorable impact on net sales for the three months ended March 31, 2013. Active Managers within Synergy WorldWide totaled approximately 3,100 and 2,900 at March 31, 2013 and 2012, respectively. Active Distributors and customers within Synergy WorldWide totaled approximately 53,900 and 52,900 at March 31, 2013 and 2012, respectively. Synergy WorldWide's business model is operating under a traditional network marketing approach.

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

In Europe, net sales revenues increased approximately $1.8 million, or 26.0 percent, for the three months ended March 31, 2013, compared to the same period in 2012. In local currency, net sales increased 25.0 percent for the three months ended March 31, 2013, compared to the same period in 2012. Fluctuations in foreign exchange rates had a $0.1 million favorable impact on net sales for the three months ended March 31, 2013. Strong Distributor leadership in recruiting and training efforts continues to effectively build our Distributor base thereby driving increased market penetration. Following the successful resolution of temporary shipping restrictions to Norwegian Distributors by the Norwegian Food Authority in late December 2012, sales returned to prior levels in the first quarter of 2013.

In Korea, net sales revenues increased approximately $1.1 million, or 20.0 percent, for the three months ended March 31, 2013, compared to the same period in 2012. In local currency, net sales increased 15.5 percent for the three months ended March 31, 2013, compared to the same period in 2012. Fluctuations in foreign exchange rates had a $0.3 million favorable impact on net sales for the three months ended March 31, 2013. Net sales growth is due to strong Distributor leadership and a well-defined selling system supported by a structured training program.

In Japan, net sales revenues decreased approximately $0.2 million, or 6.6 percent, for the three months ended March 31, 2013, compared to the same period in 2012. In local currency, net sales increased 8.7 percent, compared to the same period in 2012. Fluctuations in foreign exchange rates had a $0.3 million unfavorable impact on net sales for the three months ended March 31, 2013. The increase in local currency sales was due to unusually high product returns during the first quarter of 2012 related to a specific promotion that contributed significantly to reduced net sales revenue for 2012. Product returns were not related to product quality and have since returned to historical low return rates.

In North America, net sales revenues decreased approximately $0.7 million, or 14.5 percent, for the three months ended March 31, 2013, compared to the same period in 2012. The decline in sales is primarily driven by lower Distributor recruiting. In order to return the market to growth, we have launched new initiatives aimed at increasing leadership involvement and driving Distributor recruitment; these initiatives include a weight-management product line, training meetings and sales promotions.

Further information related to NSP Americas, Asia Pacific and Europe, NSP Russia, Central and Eastern Europe, 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 Sales

Cost of sales as a percent of net sales revenue decreased to 25.3 percent for the three months ended March 31, 2013 compared to 25.6 percent for the same period in 2012.

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 product sales levels. Volume incentives vary slightly, on a percentage basis, by product due to our pricing policies and commission plans in place and the sales mix in our various markets. Volume incentives as a percent of net sales revenue increased to 36.3 percent for the three months ended March 31, 2013, compared to 36.1 percent for the same period in 2012.


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Selling, General and Administrative

Selling, general and administrative expenses increased by approximately $3.7 million to $30.1 million for the three months ended March 31, 2013. Selling, general and administrative expenses were 31.2 percent of net sales revenue for the three months ended March 31, 2013, compared to 28.4 percent for the same period in 2012.

Significant increases to selling, general and administrative expenses during the three months ended March 31, 2013, compared to the same period in 2012 included:

$1.5 million of increased Synergy Europe, Synergy Korea and NSP U. S. compensation and other benefit costs as a result of the Company's investment in sales, marketing and product development personnel that will further encourage growth of net sales and profitability;

$1.4 million of one-time severance costs and the acceleration of stock option expense incurred related to the resignation of our former Chief Executive Officer;

Other Income (Expense), Net

Other income (expense), net for the three months ended March 31, 2013 increased $0.4 million compared to the same period in 2012 due to increased foreign exchange rate gains.

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 period in which they occur. For the three months ended March 31, 2013 and 2012, the Company's provision for income taxes, as a percentage of income before income taxes was 33.1 percent and 20.3 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended March 31, 2013 was primarily attributed to net favorable foreign items related to foreign tax rate differences, the impact of unremitted earnings, and adjustments to foreign valuation allowances (-9.7 percent), offset, in part, by an increase in tax liabilities associated with uncertain tax positions (7.7 percent).

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended March 31, 2012 was primarily attributed to foreign deductible items, including a favorable inflation adjustment (-4.4 percent), and a decrease in tax liabilities associated with uncertain tax positions due to the expiration of the statute of limitations on certain liabilities in various foreign jurisdictions (-9.5 percent), in addition to a valuation allowance release related to the utilization of foreign tax credits (-4.7 percent).

Changes to the effective rate due to dividends received from foreign subsidiaries, impact of foreign tax credits and the unremitted earnings calculation are expected to be recurring; however, depending on various factors, the changes may be favorable or unfavorable in a particular period. The Company's aggregate consolidated effective tax rate will typically reflect differences between the lower statutory rates in foreign markets compared to the U.S. statutory rate of 35 percent. Given the large number of jurisdictions in which the Company does business and the number of factors that can impact effective tax rates in any given year, the consolidated effective rate is likely to reflect relatively significant fluctuations from year-to-year.

The Company's U.S. federal income tax returns for 2009 through 2011 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2006 through 2012. The Internal Revenue Service ("IRS") is currently conducting an audit of the Company's U.S. federal income tax returns for the 2009 through 2011 tax years.

As of March 31, 2013, the Company had accrued $10.6 million of liabilities related to unrecognized tax benefits compared with $10.6 million as of December 31, 2012. This net increase was primarily attributed to the increase in transfer pricing contingencies, including anticipated increases in penalties and interest.


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Although the Company believes its estimates related to its unrecognized tax benefits are reasonable, the Company can provide no assurances that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. Any differences in the final tax outcome of these matters could have a material impact on the Company's income tax provision and operating results in the periods in which the Company makes such determination.

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