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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to                        .

Commission File Number:  0-8707

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

75 East 1700 South

Provo, Utah  84606

(Address of principal executive offices and zip code)

(801) 342-4300

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x.

The number of shares of Common Stock, no par value, outstanding on April 29, 2011 was 15,532,909 shares.

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NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-Q

For the Quarter Ended March 31, 2011

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PART I FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (Amounts in thousands, except per share information)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per-share information)

(Unaudited)

(1)                     Basis of Presentation

Nature’s Sunshine Products, Inc. and its subsidiaries (hereinafter referred to collectively as the “Company”) are primarily engaged in the manufacturing and marketing of nutritional, herbal, weight management, energy and other complementary products. Nature’s Sunshine Products, Inc. is a Utah corporation with its principal place of business in Provo, Utah. The Company sells its products to a sales force of independent Distributors and Managers who use the products themselves or resell them to other Distributors or consumers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of the Company’s major product groups are subject to regulation by one or more governmental agencies.

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

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial information as of  March 31, 2011, and for the three-month periods ended March 31, 2011 and 2010.  The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year ending December 31, 2011.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Discontinued Operations

As more fully described in Note 2, “Discontinued Operations,” the Company ceased the operations of its Brazilian subsidiary in the third quarter of 2010, and the results of its operations are classified as discontinued operations in the Company’s statements of operations and accompanying notes for all periods presented.

Classification of Venezuela as a Highly Inflationary Economy and Devaluation of Its Currency

As of January 1, 2010, Venezuela was designated as a highly inflationary economy. Accordingly, the U.S. dollar became the functional currency for the Company’s subsidiary in Venezuela. All gains and losses resulting from the re-measurement of its financial statements are determined using official rates. On January 8, 2010, the Venezuelan government announced the devaluation of the bolivar against the U.S. dollar.

Currency restrictions enacted by the government of Venezuela require approval from the government’s currency control agency organization in order for the Company’s subsidiary in Venezuela to obtain U.S. dollars at the official exchange rate to pay for imported products or to repatriate dividends back to the Company. Prior to January 1, 2010, the market rate, which is substantially lower than the official rate, was available to obtain U.S. dollars or other currencies without approval of the government’s currency control organization. In 2010, the government of Venezuela enacted additional currency restrictions, which effectively replaced the market rate with the System for Foreign Currency Denominated Securities (“SITME”), which is administered by the Venezuela Central Bank. Under SITME, entities domiciled in Venezuela can obtain U.S. dollar denominated securities in limited quantities each month through banking institutions approved by the government.

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At this time, the Company is not able to estimate reasonably the future state of exchange controls in Venezuela and its availability of U.S. dollars at the official exchange rate or at the SITME rate. However, the Company has been successful repatriating funds from Venezuela for imported products using the SITME rate. The Company re-measures its results in Venezuela at the SITME rate, which was approximately 5.30 bolivars per U.S. dollar as of March 31, 2011.

As a result of the events described in the preceding paragraphs, the Company recorded a gain of $3,668 in the first quarter of 2010 in connection with the re-measurement of its balance sheet to reflect the highly inflationary designation and the devaluation due to the negative position of the Company’s Venezuelan subsidiary’s net monetary assets, which is recorded in foreign exchange gains or losses, a part of other income. The success of future operations will be affected by several factors, including the Company’s ability to take actions to mitigate the effect of devaluation, further actions of the Venezuelan government and economic conditions in Venezuela, such as inflation and consumer spending.

During the three months ended March 31, 2011 and 2010, the Company’s Venezuelan subsidiary’s net sales revenue represented approximately 1.4 percent and 1.7 percent of consolidated net sales revenue, respectively. The Company’s Venezuelan subsidiary held total assets of $8,104 and $8,024 (which includes an intercompany receivable denominated in U.S. dollars of $2,010 and $1,978) and net assets of $5,205 and $4,185 at March 31, 2011 and December 31, 2010, respectively.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires new disclosures related to fair value measurements and clarifies existing disclosure requirements about the level of disaggregation, inputs and valuation techniques. Specifically, reporting entities now must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for Level 3 fair value measurements, a reporting entity should present separately information about purchases, sales, issuances and settlements. The guidance clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities for disclosure of fair value measurement, considering the level of disaggregated information required by other applicable U.S. GAAP guidance and should also provide disclosures about the valuation techniques and inputs used to measure fair value for each class of assets and liabilities. This guidance was effective for the Company on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements, which became effective for the Company on January 1, 2011. The adoption of the applicable sections of this guidance effective on January 1, 2010 and 2011 did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

(2)                 Discontinued Operations

During 2010, the Company ceased its operations in Brazil as a result of increased regulatory restrictions and declining sales, which made it difficult for the Company to register and sell key products in that market. This market was part of the Company’s NSP International segment.

The following table summarizes the operating results of the Company’s discontinued operations for the periods indicated:

The cash flows from our discontinued operations are included in the Company’s operating cash flows, but were insignificant.

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(3)                     Inventories

Inventories consist of the following:

(4)                     Intangible Assets

At March 31, 2011 and December 31, 2010, intangibles for product formulations had a gross carrying amount of $1,763 and $1,763, accumulated amortization of $497 and $460, and a net amount of $1,266 and $1,303, respectively. The estimated useful lives of the product formulations range from 9 to 15 years.

Amortization expense for intangible assets for the three months ended March 31, 2011 and 2010 was $37 and $30, respectively. Estimated amortization expense for each of the five succeeding fiscal years is $149.

(5)                     Investments

The amortized cost and estimated fair values of available-for-sale securities by balance sheet classification are as follows:

The municipal obligations held at a fair value of $1,738 at March 31, 2011 all mature in less than five years.

During the three-month periods ended March 31, 2011 and 2010, the proceeds from the sales of available-for-sale securities were $686 and $0, respectively. There were no gross realized gains (losses) on sales of available-for-sale securities (net of tax) for the three-month periods ended March 31, 2011 and 2010, respectively.

The Company’s trading securities portfolio totaled $1,770 at March 31, 2011 and $1,778 at December 31, 2010, and generated gains of $81 and $44 for the three months ended March 31, 2011 and 2010, respectively.

As of March 31, 2011 and December 31, 2010, the Company had unrealized losses of $17 and $15, respectively, in its U.S. government securities funds. These losses are due to the interest rate sensitivity of the U.S. government securities funds.

(6)                     Net Income Per Share

Basic net income per common share (“Basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share.

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The following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three months ended March 31, 2011 and 2010:

Potentially dilutive shares excluded from diluted per share amounts include performance based options to purchase shares of common stock for which certain earnings metrics have not been achieved. Potentially anti-dilutive shares excluded from diluted per share amounts include both non-qualified stock options and unearned performance based options to purchase shares of common stock with exercise prices greater than the weighted-average share price during the period.

(7)                     Comprehensive Income

The components of comprehensive income, net of tax, for the three months ended March 31, 2011 and 2010, respectively, are as follows:

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(8)                     Share-based Compensation

Stock option activity for the three months ended March 31, 2011 is as follows:

During the three-month period ended March 31, 2011, the Company issued options to purchase 405 shares of common stock under the 2009 Incentive Plan to the Company’s executive officers and other employees, all of which were subject to achieving certain earnings metrics. These options were issued with an exercise price of $8.88 per share, and a grant date fair value of $4.02 per share. All of the options issued have an option termination date of ten years from the option grant date.

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the three-month period ended March 31, 2011:

Expected option lives and volatilities are based on historical data of the Company. The risk free interest rate is calculated as the average U.S. Treasury obligation rate that corresponds with the option life.

Share-based compensation expense from qualified stock options for the three-month periods ended March 31, 2011 and 2010, was approximately $88 and $69, respectively; the related tax benefit was approximately $34 and $25, respectively. As of March 31, 2011 and December 31, 2010, the unrecognized share-based compensation cost related to the grants described above was $325 and $451, respectively. Should the Company attain all of the earnings metrics related to the metric based stock option grants, the Company could recognize up to $2,800 of potential stock compensation expense.

At March 31, 2011, the aggregate intrinsic value of outstanding options to purchase 1,190 shares of common stock, the exercisable options to purchase 344 shares of common stock and options to purchase 185 shares of common stock expected to vest was $802, $396 and $346, respectively. At December 31, 2010, the aggregate intrinsic value of options outstanding to purchase 859 shares of common stock was $855.

(9)                     Segment Information

The Company has three business segments. These business segments are components of the Company for which separate information is available that is evaluated regularly by the chief executive officer in deciding how to allocate resources and in assessing relative performance.

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 and in countries outside the United States. The Company’s third reportable business segment operates under the Synergy Worldwide brand, which offers products with formulations that are sufficiently different from those of Nature’s Sunshine Products and has marketing and Distributor compensation plans that are sufficiently different from those of Nature’s Sunshine Products to warrant accounting for these operations as a separate business segment. Net sales revenues for each segment have been reduced by intercompany sales as they are not included in the measure of segment profit or loss reviewed by the chief executive officer. The Company evaluates performance based on operating income (loss) by segment before consideration of certain inter-segment transfers and expenses.

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Reportable business segment information is as follows:

The Company moved its Dominican Republic market from the NSP United States segment to the NSP International segment during the quarter ended March 31, 2011, and has made conforming changes to the results presented above as of March 31, 2010. The net sales revenue and operating loss of this market were $1,168 and ($89) as of March 31, 2010, respectively.

From an individual country perspective, only the United States comprises approximately 10 percent or more of consolidated net sales revenue for either of the three-month periods ended March 31, 2011 and 2010 as follows:

Net sales revenue by product group has not been disclosed as management has determined that it is impracticable to accumulate such information.

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From an individual country perspective, only the United States and Venezuela comprise 10 percent or more of consolidated property, plant and equipment as follows:

(10)              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, 2011 and 2010, the Company’s provision (benefit) for income taxes, as a percentage of income before income taxes (benefit) was a provision of 16.0 percent and a benefit of 37.5 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, 2011 was primarily attributed to net decreases in tax liabilities associated with uncertain tax positions due to the expiration of the statute of limitations on certain liabilities in various foreign jurisdictions, which resulted in a tax benefit of approximately $1,200.

The differences between the effective tax rate and the federal statutory tax rate for the three months ended March 31, 2010 were primarily attributed to:

·                  decreases in tax liabilities associated with uncertain tax positions due to the expiration of the statue of limitations on certain liabilities in various foreign jurisdictions, which resulted in a tax benefit of $1,361,

·                  foreign subsidiary net losses for which no tax benefit was being recognized, and

·                  the foreign exchange gain related to the implementation of highly-inflationary accounting for Venezuela recognized for financial reporting purposes, but not for income tax purposes.

As of March 31, 2011, the Company had accrued $14,886 (net of $5,687 of other assets related to competent authority and royalty benefits) related to unrecognized tax positions compared with $15,679 (net of $5,687 of other assets related to competent authority and royalty benefits) as of December 31, 2010. This net decrease was primarily attributed to the expiration of the statute of limitations on certain liabilities in various foreign jurisdictions.

The Company’s U.S. federal income tax returns for 2003 through 2009 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions which have open tax years from 2000 through 2009. The Internal Revenue Service (“IRS”) is currently conducting an audit of the Company’s U.S. federal income tax returns for the 2006 through 2008 tax years.

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.

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(11)              Commitments and Contingencies

Legal Proceedings

The Company is party to various legal proceedings, including those noted below. Management cannot predict the ultimate outcome of these proceedings, individually or in the aggregate, or their resulting effect on the Company’s business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. The Company maintains directors’ and officers’ liability, product liability, general liability and excess liability insurance coverage. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to the Company, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.

NutriPlus LLC Arbitration

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.

Other Litigation

The Company is party to various other legal proceedings in several foreign jurisdictions related to VAT assessments and other civil litigation. Although there is a reasonable possibility that a material loss may be incurred, the Company cannot at this time estimate the loss, if any. Therefore, no provision for losses has been provided. The Company believes future payments related to these matters could range from $0 to approximately $1,500.

Non-income Tax Contingencies

The Company has reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. The Company provides provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters, including value added taxes and sales tax. The Company provides provisions for U.S. state sales taxes in each of the states where the Company has nexus. As of March 31, 2011 and December 31, 2010, accrued liabilities include $9,461 and $10,235, respectively, related to non-income tax contingencies. While management believes that the assumptions and estimates used to determine this liability are reasonable, the ultimate outcome of those matters cannot presently be determined. The Company is not able at this time to predict the ultimate outcomes of those matters or to estimate the effect the ultimate outcomes, if greater than the amounts accrued, would have on the financial condition, results of operations or cash flows of the Company.

Government Regulations

The Company is subject to governmental regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and to the Company’s direct selling system. The Company is also subject to the jurisdiction of numerous foreign tax and customs authorities. Any assertions or determinations that either the Company or the Company’s Distributors are not in compliance with existing statutes, laws, rules or regulations could potentially have a material adverse effect on the Company’s operations. In addition, in any country or jurisdiction, the adoption of new statutes, laws, rules or regulations, or changes in the interpretation of existing statutes, laws, rules or regulations could have a material adverse effect on the Company and its operations.

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Although management believes that the Company is in compliance, in all material respects, with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with applicable statutes, laws, rules and regulations will not be challenged by foreign authorities or that such challenges will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

(12)              Fair Value Measurements

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values of each financial instrument. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data

The following table presents the Company’s hierarchy for its asset measured at fair value on a recurring basis as of March 31, 2011:

The following table presents the Company’s hierarchy for its asset measured at fair value on a recurring basis as of December 31, 2010:

Investments available for sale — The majority of the Company’s investment portfolio consists of various fixed income securities such as U.S government funds, state and municipal bonds, mutual funds, short-term deposits and equity securities.  The Level 1 securities are valued using quoted prices for identical assets in active markets including equity securities, U.S. government treasuries, and various mutual funds.  The Level 2 securities include investments in state and municipal bonds whereby all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.

Investment securities — The majority of the Company’s trading portfolio consists of various marketable securities that are using quoted prices in active markets.

For the three months ended March 31, 2011 and December 31, 2010, there were no fair value measurements using the significant unobservable inputs (Level 3).

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The carrying amounts reflected on the consolidated balance sheet for cash and cash equivalents, accounts and notes receivable, and accounts payable approximate fair value due to their short-term nature. During the three months ended March 31, 2011, the Company did not have any write-offs related to the re-measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

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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, 2010, 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. and its subsidiaries are primarily engaged in the manufacturing and marketing of nutritional, herbal, weight management, energy and other complementary products. Nature’s Sunshine Products, Inc. is a Utah corporation with its principal place of business in Provo, Utah. We sell our products to a sales force of independent Distributors and Managers who use the products themselves or resell them to other Distributors or consumers. 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. We also sell our products through a separate division and operating business segment, Synergy Worldwide. Synergy Worldwide offers products with formulations sufficiently different from those of the Nature’s Sunshine Products offerings to warrant its treatment as a separately reportable business segment. In addition, Synergy Worldwide’s marketing and Distributor compensation plans are sufficiently different from those of Nature’s Sunshine Products to warrant accounting for these operations as a separate business segment.

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

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.

Over the same period, 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.

As a result of our overall growth in net sales revenue and reductions in operating expenses, our operating income increased from 0.7 percent in the prior year to 8.2 percent of net sales revenue.

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 slightly increased and totaled approximately 30,300 and 29,900 at March 31, 2011 and 2010, respectively. Active Distributors worldwide slightly increased and totaled approximately 696,400 and 693,200 at March 31, 2011 and 2010, 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 March 31, 2011 and 2010 (dollar amounts in thousands).

Net Sales Revenue

Consolidated net sales revenue for the three months ended March 31, 2011 was $92.8 million compared to $86.8 million in 2010, an increase of approximately 7.0 percent. The increase in net sales revenue for the three months ended March 31, 2011 compared to the same period in 2010, is primarily due to improvements in our Synergy Worldwide segment, and was partially offset by a decline in our NSP United States segment.

NSP United States Segment

Net sales revenue for our NSP United States segment for the three months ended March 31, 2011 was $35.6 million compared to $36.7 million for the same period in 2010, or a decrease of 2.8 percent in 2011 compared to 2010. Shifting the timing of our national convention from the fall of 2010 to the spring of 2011 negatively affected Manager retention and Distributor recruiting efforts during the prior year, which has continued to adversely affect our sales during the current year. The prior year quarter also included heavy Manager and Distributor purchases in advance of price increases the following quarter. Net sales revenue also decreased compared to the same period in the prior year due to changes to some of our promotional programs.

The NSP United States segment includes both English and Spanish language sales divisions, of which the English language division is approximately 80 percent of segment net sales revenue. English language division net sales revenue decreased $0.6 million for the three months ended March 31, 2011, or 2.2 percent, compared to the same period in 2010. Our Spanish language division net sales revenue decreased $0.5 million, or 5.1 percent, for the three months ended March 31, 2011, compared to the same period in 2010. While both the English and Spanish language divisions were significantly affected by shifting the timing of the national convention from 2010 to 2011 and the corresponding effect on Manager and Distributor retention, the change to some of our promotional programs had a more significant impact on our Spanish language division.

During our National Convention held in March 2011, we launched the Brilliant Body, Brilliant Business program and the response from the field was positive. This significant initiative aims to expand our Manager and Distributor base by emphasizing daily consumption of our products and providing an easier and more standardized approach for recruiting and retaining new members. This program is in its early development stage and it is our intention to build the program over the next few years.

Active Managers within NSP United States totaled approximately 6,500 and 7,200 at March 31, 2011 and 2010, respectively. The decrease in the number of active managers was caused by the discontinuance of a program that allowed Distributors to attain

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Manager status by meeting low performance criteria and the lingering effect of shifting the timing of our national convention. Active Distributors within NSP United States totaled approximately 205,000 and 231,000 at March 31, 2011 and 2010, respectively.

NSP International Segment

Our NSP International segment reported net sales revenue for the three months ended March 31, 2011 of $36.5 million, compared to $36.2 million for the same period in 2010, an increase of approximately 1.0 percent.  In local currencies, net sales decreased 0.3 percent, compared to the same period in 2010. Fluctuation in foreign exchange rates had a $0.5 million favorable impact on net sales for the three months ended March 31, 2011. The decrease in sales is due to lower local currency sales in our Dominican Republic, Japan and Mexico markets, offset by higher sales in our Russian markets and positive currency fluctuations.

We had the following significant results within the markets of our NSP International segment:

In our Russian markets (Russia, Ukraine and several other Eastern European nations), net sales revenues increased approximately $1.0 million, or 6.7 percent, for the three months ended March 31, 2011, compared to the same period in 2010. Our Russian markets continue to build on the momentum gained in the prior year as a result of improved Manager and Distributor recruiting efforts and strengthening economies in the region.

In the Dominican Republic, our net sales revenues decreased approximately $0.5 million, or 41.7 percent, for the three months ended March 31, 2011, compared to the same period in 2010. The decrease in sales is due the elimination of promotional programs and events which historically had promoted sales growth, but did not produce profitable results.

In Japan, our net sales revenues decreased approximately $0.2 million, or 10.0 percent, for the three months ended March 31, 2011, compared to the same period in 2010. In local currency, net sales decreased 20.0 percent, compared to the same period in 2010. Fluctuations in foreign exchange rates had a $0.2 million favorable impact on net sales for the three months ended March 31, 2011. The decrease in local currency sales is partially due to the recent earthquake, tsunami and subsequent nuclear disasters, which has suppressed consumer confidence and spending and has made it difficult to ship ordered products, as well as retain active Distributors.  Our future sales may be negatively affected while Japan begins to rebuild and recover from these recent disasters.

In Mexico, our net sales revenues decreased approximately $0.3 million, or 8.3 percent, for the three months ended March 31, 2011, compared to the same period in 2010. In local currency, net sales decreased 14.3 percent, compared to the same period in 2010. Fluctuations in foreign exchange rates had a $0.2 million favorable impact on net sales for the three months ended March 31, 2011. The decrease in local currency net sales is due to a tax law interpretation by the Mexican taxing authority requiring the collection of value-added tax on all of our products sold in Mexico.

Active Managers within NSP International totaled approximately 21,200 and 21,000 at March 31, 2011 and 2010, respectively. Active Distributors within NSP International totaled approximately 409,800 and 387,500 at March 31, 2011 and 2010 respectively.

Synergy Worldwide Segment

Synergy Worldwide reported net sales revenue for the three months ended March 31, 2011 of $20.7 million, compared to $13.9 million in 2010, an increase of approximately 48.1 percent. In local currencies, net sales increased 42.8 percent for the three months ended March 31, 2011, compared to the same period in 2010. Fluctuations in foreign exchange rates had a $0.7 million favorable impact on net sales for the three months ended March 31, 2011 compared to the same period in 2010. The increase in net sales was primarily due to growth in our United States, Korean and European markets, and the opening of our Vietnam market, offset by sales declines in our Japan market.

We had the following significant results within the markets of our Synergy Worldwide segment:

In the United States, our net sales revenues increased approximately $2.5 million, or 96.2 percent, for the three months ended March 31, 2011, compared to the same period in 2010.  Our growth within the Unites States is due to effective Company and Manager sales and marketing efforts of a well-accepted product offering, which has resulted in the growth of our U.S. Distributor base.

In Europe, our net sales revenues increased approximately $2.2 million, or 88.0 percent, for the three months ended March 31, 2011, compared to the same period in 2010. In local currency, our net sales increased 83.1 percent, compared to the same period in 2010.  Fluctuations in foreign exchange rates had a $0.1 million favorable impact on net sales for the three months ended March 31, 2011 compared to the same period in 2010. Our growth in Europe is due to increased market penetration primarily within Austria, Norway and Sweden.

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In Korea, our net sales revenues increased approximately $1.4 million, or 70.0 percent, for the three months ended March 31, 2011, compared to the same period in 2010. In local currency, our net sales increased 60.3 percent, compared to the same period in 2010.  Fluctuations in foreign exchange rates had a $0.1 million favorable impact on net sales for the three months ended March 31, 2011, compared to the same period in 2010. Our growth in Korea is due to strong and productive Company and Manager development of sales groups and a broader product line that is well accepted in the market.

In Japan, our net sales revenues decreased approximately $0.1 million, or 2.5 percent, for the three months ended March 31, 2011, compared to the same period in 2010.  In local currency, net sales decreased 13.6 percent compared to the same period in 2010. Fluctuations in foreign exchange rates had a $0.4 million favorable impact on net sales for the three months ended March 31, 2011, compared to the same period in 2010. Recent signs of strengthening of the business in Japan were stalled by the recent earthquake, tsunami and subsequent nuclear disaster.  Our future sales may be negatively affected while Japan begins to rebuild and recover from these recent disasters.

Active Managers within Synergy Worldwide totaled approximately 2,600 and 1,700 at March 31, 2011 and 2010, respectively. Active Distributors within Synergy Worldwide totaled approximately 81,600 and 74,700 at March 31, 2011 and 2010, respectively.

Further information related to NSP United States, NSP International and Synergy Worldwide business segments is set forth in Note 9 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 decreased to 20.0 percent in 2011 compared to 20.6 percent in 2010. This decrease is primarily due to the write-off of finished products in some of our foreign markets during the prior year, offset by increased importation fees related to higher transfer prices within some of our foreign markets during the current quarter and changes in product mix between markets.

Volume Incentives

Volume incentives are a significant part of our direct sales marketing program and represent commission payments made to our independent Distributors and Managers. 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 decreased to 36.9 percent in 2011, compared to 37.5 percent in 2010. The decrease is primarily due to reductions in volume incentive payment rates due to our lower Manager and Distributor base within the NSP United States segment and an increase in product purchases with a lower volume incentive in Synergy Worldwide.

Selling, General and Administrative

Selling, general and administrative expenses decreased to 34.9 percent of net sales revenue for the three months ended March 31, 2011, compared to 41.2 percent in 2010, or by approximately $3.4 million to $32.4 million in the first quarter of 2011.

Significant increases to selling, general and administrative expenses during the three months ended March 31, 2011, compared to the same period in 2010 included:

·                  increased variable costs of $0.7 million related to the sales growth of Synergy Worldwide in Europe, Korea, the United States and Vietnam as well as NSP International in the Russian markets;

·                  approximately $0.5 million of unfavorable currency fluctuations, which may be recurring depending upon changes in future exchange rates relative to the U.S. dollar; and

·                  approximately $0.4 million in professional fees related to litigation costs.

Significant decreases to selling, general and administrative expenses during the three months ended March 31, 2011, compared to the same period in 2010 included:

·                  decreased administrative costs of $1.5 million in U.S. convention related costs due to the differences in event qualification periods between years;

·                  decreased U.S. compensation and other benefit related costs of $1.0 million;

·                  cost reductions in many of our foreign markets totaling approximately $1.0 million;

·                  a $0.4 million decrease in foreign value-added tax reserves between periods;

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·                  a $0.4 million decrease in U.S. sales tax reserves between periods; and

·                  a decrease of $0.4 million related to our U.S. healthcare costs during 2011.

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

Operating Income

Consolidated operating income increased approximately $7.1 million during the three months ended March 31, 2011, compared to the same period in 2010, from $0.6 million to $7.6 million.

Operating income for NSP United States increased $3.3 million for the three months ended March 31, 2011, compared to the same period in 2010, from $0.5 million to $3.8 million. The increase in operating income is primarily the result of significant cost reductions in our selling, general and administrative expenses described above.

Operating income for NSP International increased approximately $1.2 million for the three months ended March 31, 2011, compared to the same period in 2010, from $0.8 million to $2.1 million, primarily as the result cost reductions within our foreign markets and positive change in foreign VAT reserves, offset in part by increased costs related to growth in our Russian markets.

Operating income for Synergy Worldwide increased $2.5 million for the three months ended March 31, 2011, compared to the same period in 2010, from an operating loss of $0.7 million to operating income of $1.8 million. This was primarily due to improvements in sales within its European, U.S, and Korean subsidiaries.

Other Income, Net

Other income, net for the three months ended March 31, 2011 decreased $2.6 million, compared to the same period in 2010. The decrease is primarily due to prior year foreign exchange gains of $3.7 million in Venezuela as a result of the devaluation of the bolivar and the change to a highly inflationary economy that were non-recurring, offset by net foreign exchange gains and losses in certain of our other markets based on changes in exchange rates.

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, 2011 and 2010, the Company’s provision (benefit) for income taxes, as a percentage of income before income taxes (benefit), was a tax provision of 16.0 percent and a benefit of 37.5 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, 2011 was primarily attributed to net decreases in tax liabilities associated with uncertain tax positions due to the expiration of the statute of limitations on certain liabilities in various foreign jurisdictions, which resulted in a tax benefit of approximately $1.2 million.

The differences between the effective tax rate and the federal statutory tax rate for the three months ended March 31, 2010 were primarily attributed to:

·                  decreases in tax liabilities associated with uncertain tax positions due to the expiration of the statue of limitations on certain liabilities in various foreign jurisdictions, which resulted in a tax benefit of $1.4 million,

·                  foreign subsidiary net losses for which no tax benefit was being recognized, and

·                  the foreign exchange gain related to the implementation of highly-inflationary accounting for Venezuela recognized for financial reporting purposes, but not for income tax purposes.

The Company’s U.S. federal income tax returns for 2003 through 2009 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions which have open tax years from 2000 through 2009. The Internal Revenue Service (“IRS”) is currently conducting an audit of the Company’s U.S. federal income tax returns for the 2006 through 2008 tax years.

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

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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.

Discontinued Operations

During 2010, we ceased our operations in Brazil as a result of increased import regulations and declining sales. As a result, we reclassified the Brazil subsidiary’s operations to discontinued operations. During 2011, there were no significant costs related to this market. This market represented less than 0.3 percent of our consolidated net sales for 2010.

LIQUIDITY AND CAPITAL RESOURCES

Our principal use of cash is to pay for operating expenses, including volume incentives, inventory and raw material purchases, capital assets and funding of international expansion. As of March 31, 2011, working capital was $48.7 million, compared to $41.4 million as of December 31, 2010.  At March 31, 2011, we had $55.4 million in cash and cash equivalents, of which $43.9 million was held in our foreign markets and may be subject to various withholding taxes and other restrictions related to repatriation, and $5.8 million in unrestricted short-term investments, which were available to be used along with our normal cash flows from operations to fund any unanticipated shortfalls in future cash flows.

Our net consolidated cash inflows (outflows) are as follows (in thousands):