Nature's Sunshine(NATR) - 2022 Q2 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) Nature's Sunshine Products reported a sharp decline in Q2 2022 net income and a H1 2022 net loss, with decreased assets and negative operating cash flow Condensed Consolidated Balance Sheets Total assets decreased to $233.1 million by June 30, 2022, primarily due to reduced cash, while inventories increased and shareholders' equity declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $56,344 | $86,184 | | Inventories | $70,643 | $60,852 | | Total current assets | $147,145 | $164,667 | | Total assets | $233,059 | $258,874 | | Liabilities & Equity | | | | Total current liabilities | $69,119 | $76,670 | | Total liabilities | $88,580 | $97,470 | | Total shareholders' equity | $144,479 | $161,404 | Condensed Consolidated Statements of Operations Q2 2022 net sales decreased 4.4% to $104.2 million, with net income dropping to $0.5 million, and H1 2022 resulted in a $2.4 million net loss Q2 Operating Results (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Net sales | $104,161 | $108,978 | | Gross profit | $74,690 | $80,515 | | Operating income | $5,755 | $9,486 | | Net income attributable to common shareholders | $516 | $6,540 | | Diluted EPS | $0.03 | $0.32 | Six-Month Operating Results (in thousands, except per share data) | Metric | H1 2022 | H1 2021 | | :--- | :--- | :--- | | Net sales | $214,655 | $211,399 | | Gross profit | $150,724 | $155,957 | | Operating income | $7,064 | $17,121 | | Net (loss) attributable to common shareholders | $(2,434) | $10,556 | | Diluted EPS | $(0.12) | $0.52 | Condensed Consolidated Statements of Cash Flows H1 2022 saw $9.3 million net cash used in operating activities, a reversal from prior year, primarily due to increased inventories and $14.0 million used in financing for stock repurchases Six-Month Cash Flow Summary (in thousands) | Activity | H1 2022 | H1 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(9,343) | $10,712 | | Net cash used in investing activities | $(3,757) | $(2,898) | | Net cash used in financing activities | $(14,018) | $(23,630) | | Net decrease in cash and cash equivalents | $(29,840) | $(17,167) | - The primary uses of cash in financing activities for H1 2022 were $12.0 million for common stock repurchases and $1.1 million for tax withholding on equity awards. In contrast, H1 2021 included a $19.9 million cash dividend payment[24][141] Notes to Condensed Consolidated Financial Statements Key notes reveal increased inventories, expanded share repurchases, strong sales growth in Asia offset by declines elsewhere, and a significantly higher effective tax rate due to a valuation allowance Note 6: Capital Transactions The company authorized an additional $30.0 million for share repurchases in March 2022, buying back $12.0 million in H1 2022, with $25.6 million remaining available - On March 8, 2022, the share repurchase program was amended to allow for an additional $30.0 million in common share repurchases[45] - For the six months ended June 30, 2022, the company repurchased 741,000 shares for $12.0 million. The remaining authorized amount for repurchase was $25.6 million[45] Note 7: Segment Information Asia was the sole growth segment in Q2 2022, with net sales up 8.8% to $47.4 million, offsetting declines in Europe, North America, and Latin America, while H1 Asia sales grew 17.9% Net Sales by Segment (in thousands) | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Asia | $47,382 | $43,536 | $93,492 | $79,291 | | Europe | $17,099 | $21,455 | $38,876 | $43,655 | | North America | $34,082 | $37,372 | $70,063 | $75,134 | | Latin America and Other | $5,598 | $6,615 | $12,224 | $13,319 | | Total net sales | $104,161 | $108,978 | $214,655 | $211,399 | Contribution Margin by Segment (in thousands) | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Asia | $21,432 | $18,463 | $43,371 | $33,782 | | Europe | $6,595 | $6,588 | $10,968 | $13,384 | | North America | $12,300 | $16,259 | $25,019 | $31,699 | | Latin America and Other | $2,294 | $3,762 | $5,195 | $7,394 | | Total contribution margin | $42,621 | $45,072 | $84,553 | $86,259 | Note 8: Income Taxes The effective tax rate for H1 2022 surged to 127.5% from 30.4% in H1 2021, primarily due to a valuation allowance against deferred tax assets - The effective tax rate for H1 2022 was 127.5% compared to 30.4% for H1 2021. The increase was primarily attributed to a valuation allowance recorded against deferred tax assets expected to expire before utilization[68][69][71] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q2 2022 net sales decline to geopolitical conflict, inflation, and foreign currency impacts, leading to increased costs and negative operating cash flow, despite solid liquidity Overview Q2 2022 operations were significantly impacted by a $3.1 million pretax charge from the Russia-Ukraine conflict, inflationary cost increases, and a $5.4 million negative foreign currency effect - The Russia-Ukraine conflict resulted in a pretax charge of $3.1 million for the six months ended June 30, 2022, primarily from inventory impairment and accruals for Russian operations[98] - In Q2 2022, net sales decreased 4.4%, but increased 0.5% in local currencies. The strengthening U.S. dollar negatively impacted net sales by approximately $5.4 million[102] - Inflation adversely impacted operations through higher costs for raw materials, labor, production, and transportation[101] Results of Operations Q2 2022 consolidated net sales decreased 4.4% to $104.2 million due to declines in Europe and North America, despite Asia's growth, leading to a 39.3% drop in operating income Net Sales Change by Segment (Q2 2022 vs Q2 2021) | Segment | % Change (USD) | % Change (Local Currency) | | :--- | :--- | :--- | | Asia | 8.8% | 18.8% | | Europe | (20.3)% | (16.2)% | | North America | (8.8)% | (8.5)% | | Latin America and Other | (15.4)% | (15.0)% | | Total | (4.4)% | 0.5% | - Cost of sales as a percentage of net sales increased to 28.3% in Q2 2022 from 26.1% in Q2 2021, due to inventory valuation reserves, market mix changes, inflation, and higher material and transport costs[103][121] - SG&A expenses increased by $1.3 million in Q2 2022, primarily due to higher service fees from sales growth in China, increased selling costs, and more distributor events[104][124] Liquidity and Capital Resources As of June 30, 2022, the company held $56.3 million in cash and $78.0 million in working capital, despite H1 2022 operating activities using $9.3 million in cash, primarily for inventory and share repurchases Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Operating activities | $(9,343) | $10,712 | | Investing activities | $(3,757) | $(2,898) | | Financing activities | $(14,018) | $(23,630) | - Working capital was $78.0 million at June 30, 2022, down from $88.0 million at December 31, 2021. Cash holdings were $56.3 million, with $51.4 million held in foreign markets[137] - During H1 2022, the company repurchased 741,000 shares of common stock for $12.0 million. As of June 30, 2022, $25.6 million remained available for repurchases[141] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks include currency exchange rate fluctuations, interest rate changes, and geopolitical instability, impacting its international operations and financial results - The company's primary market risks stem from fluctuations in currency exchange rates and interest rates, as well as social, political, and economic conditions inherent in its international operations[155] Controls and Procedures As of June 30, 2022, management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[156] - No changes in internal controls over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[157] Part II. Other Information Legal Proceedings The company reported no material legal proceedings during the period - None[160] Risk Factors Significant risks include geopolitical conflicts impacting the Russia market, ongoing COVID-19 disruptions, and high inflation in the U.S. and Europe increasing costs and dampening consumer spending - The Russia-Ukraine war negatively impacts operations in the region, which accounted for 13.8% of net sales in fiscal 2021. As of June 30, 2022, assets in this market were $5.2 million[163] - The COVID-19 pandemic continues to cause disruptions, including transportation delays, production limitations, and lockdowns, such as those experienced in China during Q1 and Q2 2022[164][165] - High inflation in the U.S. and Europe has resulted in increased input costs and is expected to continue to pressure net sales as consumers may reduce spending on nonessential items[167] Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2022, the company repurchased 290,000 shares for approximately $4.0 million under a board-approved plan, with $25.6 million remaining available for future repurchases Share Repurchases for Quarter Ended June 30, 2022 | Period | Total Shares Purchased (in thousands) | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2022 | 76 | $16.86 | | May 2022 | 130 | $13.21 | | June 2022 | 84 | $11.84 | | Total | 290 | N/A | - As of the end of the quarter, the maximum dollar value of shares that may yet be purchased under the plan was $25.6 million[168] Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and Inline XBRL documents