Nature's Sunshine(NATR) - 2021 Q4 - Annual Report

Part I Business Nature's Sunshine Products manufactures and sells nutritional and personal care products globally via direct selling - The company is a direct seller of nutritional and personal care products, operating through four main geographic segments: Asia, Europe, North America, and Latin America and Other[20][21] - Most products are manufactured at the company's facility in Spanish Fork, Utah, with stringent quality control procedures applied to both in-house and contract manufacturing[22] Product Line Categories | Category | Description | | :--- | :--- | | General health | Products related to blood sugar support, bone health, cognitive function, joint health, mood, sexual health, sleep, sports and energy, and vision | | Immune | Products designed to support and strengthen the human immune system | | Cardiovascular | Products that combine ingredients to give the cardiovascular system optimum support | | Digestive | Products designed to regulate intestinal and digestive functions | | Personal care | Products for external use, including oils, lotions, shampoo, toothpaste, and skin cleansers | | Weight management | Products designed to simplify weight management, including meal replacements and items that increase caloric burn rate | - As of December 31, 2021, the company employed 850 individuals, with the global workforce being 55.4% female and comprising 40.2% Caucasian, 31.4% Asian, 25.3% Hispanic, 1.6% Black, and 1.5% Other[61] - The company has established several sustainability goals, including achieving 100% renewable energy at its manufacturing facility by 2023 and a 50% reduction of GHG emissions for Scope 1 & 2 by 2025[67] Risk Factors The company faces regulatory, business, and technological risks, including compliance, consultant retention, and cybersecurity Regulatory and Litigation Risks The company faces regulatory and litigation risks from direct selling, product regulations, and anti-bribery laws - The company is subject to laws and regulations intended to prevent fraudulent or deceptive practices in direct selling, where failure to comply could result in significant penalties and business model changes[66][67][68] - The CBD product line is subject to rapidly changing federal, state, and local laws, with the FDA currently holding that CBD is not lawful in food and dietary supplements, creating regulatory uncertainty and risk[77] - The company is subject to anti-bribery laws, including the FCPA, where violations could result in criminal or civil sanctions and reputational damage[80][81] Risks Related to Our Business Key business risks include consultant retention, currency fluctuations, geopolitical events, and supply chain issues - The company's revenue is highly dependent on its ability to attract and retain independent consultants, and it experiences high turnover, with a significant portion of net sales in some markets depending on a few key consultants[82][84] - In 2021, approximately 68.9% of net sales were recognized in markets outside the United States, exposing the company to significant foreign currency exchange rate fluctuations[86] - The conflict arising from the invasion of Russia into Ukraine could adversely impact the Russia, Central and Eastern Europe business segment through sanctions, currency devaluation, and business interruptions[89] - The company is dependent on the uninterrupted operation of its primary manufacturing facility in Spanish Fork, Utah, and is subject to risks of catastrophic loss, equipment failures, and supply chain disruptions[93][96] Risks Related to Our Use of Technology and Intellectual Property The company faces technology and IP risks from cybersecurity, data privacy, IT reliance, and limited patent protection - The company collects and retains large volumes of sensitive data, making it a target for cyber-attacks, where a data breach could result in significant costs, litigation, and reputational harm[106][109] - Compliance with evolving data protection laws, such as the EU's GDPR and California's CCPA, is complex and costly, with non-compliance potentially resulting in substantial fines (up to 4% of annual revenue under GDPR)[110][111] - Most of the company's products are not protected by patents, making it reliant on trademarks (like Nature's Sunshine® and Synergy®) and other intellectual property, which may be insufficient to prevent competition[114] Unresolved Staff Comments The company reports no unresolved staff comments - None[115] Properties The company's principal properties include a leased corporate office and an owned manufacturing facility in Utah - The company owns its principal manufacturing and warehousing facility, a 270,000 square foot building in Spanish Fork, Utah[116] - Corporate offices are located in a leased 61,000 square foot facility in Lehi, Utah, with the lease expiring in 2029[116] Legal Proceedings The company is involved in various legal proceedings, accruing $0.5 million for estimated outcomes - The company has accrued $0.5 million related to the estimated outcome of various legal proceedings as of December 31, 2021[337] - The company has reserved for certain state sales and use tax and foreign non-income tax contingencies, with accrued liabilities of $0.2 million for these matters at year-end 2021[336] Mine Safety Disclosures This item is not applicable to the company - Not applicable[120] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, returning capital in 2021 through a special dividend and share repurchases - On March 10, 2021, the company announced a special non-recurring cash dividend of $1.00 per common share, paid on April 5, 2021, for an aggregate amount of $19.9 million[125] 2021 Share Repurchase Activity | Metric | Value | | :--- | :--- | | Program Authorization | $15.0 million | | Shares Repurchased in 2021 | 439,000 | | Cost of Shares Repurchased | $7.4 million | | Remaining Authorization (at Dec 31, 2021) | $7.6 million | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, consolidated net sales increased 15.3% to $444.1 million, with operating income reaching $34.7 million Results of Operations (2021 vs. 2020) In 2021, net sales increased 15.3% to $444.1 million, with operating income rising to $34.7 million due to broad-based growth Net Sales by Operating Segment (in thousands) | Segment | 2021 | 2020 | % Change | % Change (Local Currency) | | :--- | :--- | :--- | :--- | :--- | | Asia | $176,860 | $138,717 | 27.5% | 24.4% | | Europe | $91,539 | $77,688 | 17.8% | 16.2% | | North America | $149,746 | $145,481 | 2.9% | 2.4% | | Latin America and Other | $25,939 | $23,319 | 11.2% | 10.1% | | Total | $444,084 | $385,205 | 15.3% | 13.6% | - Growth in Asia was driven by strong performance in China (net sales +39.3%) and Japan (net sales +32.8%)[164][165] - Volume incentives as a percentage of net sales decreased from 34.0% in 2020 to 31.5% in 2021, primarily due to sales mix changes and cost savings from a new compensation plan[172] - Selling, general and administrative (SG&A) expenses increased by $22.8 million, primarily due to higher service fees from sales growth in China and increased selling costs for growth initiatives[174] Liquidity and Capital Resources As of December 31, 2021, the company maintained strong liquidity with $86.2 million in cash and $34.6 million in operating cash flow Consolidated Cash Flows (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Operating Activities | $34,608 | $37,659 | | Investing Activities | $(6,612) | $(4,905) | | Financing Activities | $(31,721) | $3,878 | - At year-end 2021, cash and cash equivalents totaled $86.2 million, of which $67.7 million was held in foreign markets[184] - The company had no outstanding balance under its $25.0 million revolving credit agreement as of December 31, 2021[190] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exchange rate fluctuation, with 68.9% of 2021 net sales from outside the U.S - Approximately 68.9% of net sales and 60.5% of operating expenses in 2021 were realized outside of the United States, creating significant exposure to foreign currency risk[201] Foreign Currency Risk Sensitivity Analysis (2021) | Strengthening of U.S. Dollar | Impact on Operating Income ($) | Impact on Operating Income (%) | | :--- | :--- | :--- | | 10% | $(3,030,000) | (8.7)% | | 15% | $(4,347,000) | (12.5)% | | 25% | $(6,665,000) | (19.2)% | - As of December 31, 2021, significant foreign cash holdings included $19.5 million in Chinese Yuan, $11.3 million in South Korean Won, and $10.0 million in Japanese Yen[207] Financial Statements and Supplementary Data This section presents audited consolidated financial statements and the auditor's unqualified opinion, detailing financial position, results, and cash flows Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued unqualified opinions on financial statements and internal controls, identifying deferred tax asset valuation as a critical audit matter - The auditor, Deloitte & Touche LLP, issued an unqualified (clean) opinion, stating the financial statements are presented fairly in all material respects[218] - The valuation of deferred tax assets was identified as a Critical Audit Matter, highlighting the significant auditor judgment required to evaluate management's estimates of future taxable income[222][224] Consolidated Financial Statements The 2021 consolidated financial statements show net sales of $444.1 million, net income of $28.9 million, and operating cash flow of $34.6 million Key Financial Highlights (in thousands, except per share data) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Income Statement | | | | Net Sales | $444,084 | $385,205 | | Operating Income | $34,670 | $21,482 | | Net Income (to shareholders) | $28,853 | $21,337 | | Diluted EPS | $1.42 | $1.07 | | Balance Sheet (Year-End) | | | | Total Assets | $258,874 | $249,498 | | Total Liabilities | $97,470 | $92,264 | | Total Shareholders' Equity | $161,404 | $157,234 | | Cash Flow | | | | Net Cash from Operations | $34,608 | $37,659 | Notes to Consolidated Financial Statements The notes detail revenue by segment, capital transactions, tax rate, and the Russia-Ukraine conflict's impact - Subsequent Event (Note 18): The military conflict in Ukraine, which began in February 2022, poses a significant risk to the Russia and Other market, which generated $61.4 million in net sales and $5.8 million in operating income in 2021[358] - Capital Transactions (Note 11): A special dividend of $1.00 per share ($19.9 million total) was paid in April 2021, and $7.4 million was spent repurchasing 439,000 shares under a new program[312][314] - Income Taxes (Note 10): The company's effective tax rate for 2021 was 5.1%, significantly impacted by a 19.7% rate decrease from changes in the valuation allowance, primarily from releasing the allowance on foreign tax credits[180][302] Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[364] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, an assessment audited and affirmed by Deloitte & Touche LLP[365][367] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement - Information is incorporated by reference to the definitive proxy statement[377] Executive Compensation Information on executive compensation is incorporated by reference from the definitive proxy statement - Information is incorporated by reference to the definitive proxy statement[378] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters This section details securities authorized for issuance under equity compensation plans, with 1.0 million outstanding and 2.4 million available Equity Compensation Plan Information as of December 31, 2021 | Plan Category | Securities to be Issued (a) | Weighted-Average Exercise Price (b) | Securities Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,003,250 | $12.13 | 2,454,218 | Certain Relationships and Related Transactions and Director Independence Information on related party transactions and director independence is incorporated by reference from the definitive proxy statement - Information is incorporated by reference to the definitive proxy statement[381] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the definitive proxy statement - Information is incorporated by reference to the definitive proxy statement[382] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, Schedule II (Valuation and Qualifying Accounts), and all exhibits filed with the annual report - Lists the financial statements, Schedule II (Valuation and Qualifying Accounts), and all exhibits filed with the 10-K[384][385][386] Schedule II - Tax Valuation Allowance (in thousands) | Year | Beginning Balance | Provisions | Ending Balance | | :--- | :--- | :--- | :--- | | 2021 | $15,262 | $(6,510) | $8,650 | | 2020 | $21,388 | $(6,120) | $15,262 | Form 10-K Summary The company reports no Form 10-K summary - None[392]