Nature''S Sunshine Products, Inc (NASDAQ:NATR)

Fourth Quarter 2011 Results

• Net sales were $92.1 million, compared with $89.9 million in the same quarter a year ago, an increase of 2.4 percent.
   
• Operating income from continuing operations was $9.6 million, compared with $3.5 million in the same quarter a year ago, an increase of 170.8 percent.
   
• Adjusted EBITDA, defined here as net income before taxes, depreciation and amortization, other income adjusted to exclude share-based compensation expense, was $12.3 million, compared with $4.7 million in the same quarter a year ago, an increase of 163.9 percent.
   
• Net income from continuing operations was $7.6 million, compared with a net loss of $0.4 million in the same quarter a year ago.
   
• Basic and diluted net income per share from continuing operations was $0.49 and $0.48, respectively, compared with a net loss per share of $0.02 and $0.02, respectively, for the same quarter a year ago.
   
• As of December 31, 2011, shareholders' equity was $87.4 million, compared to $68.4 million on December 31, 2010, an increase of 27.9 percent.

Third Quarter 2011 Results

• Net sales were $91.1 million, compared with $86.1 million in the same quarter a year ago, an increase of 5.8 percent.
• Basic and diluted net loss per share from continuing operations was $0.14 compared with net income per share of $0.17, for the same quarter a year ago.
• Net loss from continuing operations was $2.3 million, compared with net income from continuing operations of $2.7 million in the same quarter a year ago, a decrease of 184.2 percent. Excluding contract termination costs, pro forma net income from continuing operations was $6.8 million, compared with $2.7 million in the same quarter a year ago, an increase of 153.9 percent.
• Non-GAAP EPS was $0.43 vs loss of ($0.17) and better then analyst estimate of $0.23

NutriPlus Arbitration Settlement

On July 8, 2011, we entered into a settlement agreement with NutriPlus, from which we acquired certain assets in 1999 in order to establish our Russian business and to which we agreed to make royalty payments as a percentage of sales from our Russian business. As a result of the settlement, wherein both parties settled all claims in the arbitration and bore their own costs associated with the arbitration, 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.

For the year ended December 31, 2010, the Company recorded and expensed royalty payments to NutriPlus of approximately $5.6 million (included in selling, general and administrative expenses), which was approximately 4.0 percent of NSP International's revenue and 1.6 percent of the Company's consolidated revenue. For the six months ended June 30, 2011, the Company recorded and expensed royalty payments to NutriPlus of approximately $2.9 million, which was approximately 4.2 percent of NSP International's revenue and 1.6 percent of the Company's consolidated revenue.

As a result of the settlement, our operating costs for the quarter ended September 30, 2011, were reduced by $1.3million, which resulted in a corresponding increase to operating income of $1.3 million. Similarly, based on current sales from our Russian business, we expect the settlement will result in an annual reduction of $5.6 to $6.0 million in operating costs and a corresponding increase in operating income above the level the Company would otherwise achieve if the NutriPlus royalty obligation remained in effect. This impact on operating costs and operating income will fluctuate with sales volumes in our Russian business.

Removing NATR from the GeoSpeicial List

• Added to portfolio on May 6, 2011 @ at $9.59
• Added to the GeoSpecial list  May 9, 2011 @ $10.39

Catalyst: Crushed 2011 first quarter EPS estimates.
Current road block: Even though EPS growth is expected to grow nicely over the next couple quarters, sales growth if forecast to come in at under 5%; EPS growth is expected to dramatically slow down after the completion of the next  two quarters; Strong recent run up in share price.

Current Price: $19.49
Peak performance: Reached a high of  $19.88  on  June 27, 2011

Early, on May 6, 2011, we alerted investors that we were taking a short-term trading position in shares of NATR.

It appears that Natures Sunshine Products (NASDAQ:NATR) crushed earnings estimates of $0.09 with a $0.43 EPS for the quarter. The GeoTeam took a small short term trading position at $9.59 while we are looking to see if there were any one time events during the quarter.

Since the press release did not contain much commentary and no conference call was held, we needed a little extra time to diagnose the NATR story.  Through further due diligence, we were able to confirm that the reported 2011 first quarter EPS number of $0.43 was fairly clean, prompting us to code NATR as a GeoSpecial later during the trading session at $10.39.  It appears that NATR operations carry a good deal of leverage meaning that once revenues reach a certain point, profits begin to rapidly accelerate. Another major positive trend was the substantial decrease in SG&A expense as a percentage of revenues (from 41.2 percent in the prior year to 34.9 percent). It looks like the company expects this trend to continue.

“We continue to implement cost reduction measures within all of our operating segments.”

Of course, there is a caveat to this story in the way of potential legal problems that may limit P/E expansion.

• The company is battling with the IRS over past due tax obligations
• See other issue here.

It appears that the company has already established adequate reserves pertaining to the IRS issue, but we will have to speak to management to gain clarity on other outstanding legal issues.

We have set our initial short-term price target at about $15.00.

In October 2009, the IRS issued an examination report formally proposing adjustments with respect to the 2003 through 2005 taxable years, which primarily relate to the prices that were charged in intra-group transfers of property and the disallowance of related deductions. The Company has commenced administrative proceedings with the Office of Appeals of the Internal Revenue Service challenging the proposed adjustments. Management believes that the Company has appropriately reserved for these matters at an amount which it believes will ultimately be due upon resolution of the administrative proceedings, and such amounts reflect management’s estimates based upon available evidence resulting from discussions with the IRS Office of Appeals. These estimates are based upon a more-likely-than-not recognition threshold. The Company is currently unable to determine the outcome of these discussions and their related impact, if any, on the Company’s financial condition, results of operations, or cash flows.

Although the Company believes its estimates are reasonable, the Company can make no assurance 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. Such difference could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.

On July 12, 2010, the Company submitted a demand for arbitration to the American Arbitration Association (the “AAA”) naming NutriPlus LLC (“NutriPlus”) as respondent. The Company seeks a declaration of its rights and obligations, including with respect to royalty payments, and the calculation thereof, arising out of an Asset Purchase Agreement and subsequent Settlement Agreement entered into by the Company and NutriPlus in 1999 and 2000, respectively (together the “Purchase Agreement”).

On July 20, 2010, NutriPlus submitted its own demand for arbitration to the AAA naming the Company as respondent. NutriPlus alleges that the Company underpaid NutriPlus for royalties arising out of the Purchase Agreement. In arbitration, NutriPlus seeks damages related to the alleged underpayment and a declaratory judgment with respect to the method the Company must use in determining the amount of royalties to pay NutriPlus in the future.

The arbitration demands have been consolidated into a single proceeding, the hearing for which is currently scheduled for July 2011. The Company cannot predict the outcome at this time. The Company has been accruing a liability for unpaid royalties to NutriPlus in an amount equal to the royalties that would have been paid under the calculation method previously applied by the Company, which method the Company now contends was in error, for which it is seeking relief. This accrual may be in excess of the actual liability or insufficient, depending on the outcome of the arbitration, which the Company cannot predict at this time.

First Quarter Results:

• Net sales were $92.8 million, compared with $86.8 million in the same quarter a year ago, an increase of 7.0 percent.
• Operating income from continuing operations was $7.6 million, compared with $0.6 million in the same quarter a year ago, an increase of 1,237.0%. 
• EBITDA, defined here as net income before taxes, depreciation and amortization, other income and adjusted to include share-based compensation expense, was $8.8 million, compared with $1.8 million in the same quarter a year ago, an increase of 398.7 percent.
• Net income from continuing operations was $6.6 million, compared with net income of $4.8 million in the same quarter a year ago, an increase of 38.8 percent. 
• Basic and diluted net income per share from continuing operations was $0.43, compared with earnings per share of $0.31 for the same quarter a year ago.

During the first quarter of 2011, we experienced an increase in our consolidated net sales of 7.0 percent. Our Synergy Worldwide business segment (“Synergy Worldwide”) experienced an increase in net sales revenue of approximately 48.1 percent (or 42.8 percent in local currencies excluding the positive impact of foreign currency fluctuations). Our Nature’s Sunshine Products International business segment (“NSP International”) experienced an increase in net sales of approximately 1.0 percent compared to the same period in 2010, and a decrease in local currency net sales of 0.3 percent (excluding the positive impact of foreign currency fluctuations), while our domestic business segment (“NSP United States”) net sales decreased approximately 2.8 percent. We saw improvements in certain foreign markets due to strengthening demand as a result of current economic conditions, and growth from expansion into new or existing markets. The most significant positive impact on sales revenue was from our European, Russian, Korean and United States (Synergy) markets during the first quarter of 2011. Gains in these markets were offset by decreases in our Dominican Republic, Japan and Mexico markets

our selling, general and administrative costs as a percentage of net sales revenue have decreased from 41.2 percent in the prior year to 34.9 percent as a result of our revenue growth (primarily in Synergy), and concerted efforts to reduce our operating costs in all of our operating segments. We continue to implement cost reduction measures within all of our operating segments.

We continue to implement cost reduction measures within all of our operating segments.