NATURES SUNSHINE PRODUCTS INC (NATR) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion highlights the principal factors that have affected our financial condition, results of operations, liquidity and capital resources for the periods described. This discussion should be read in conjunction with our consolidated financial statements and the related notes in Item 8, Part 2 of this report. This discussion contains forward-looking statements. Please see “Cautionary Note Regarding Forward-Looking Statements” for the risks, uncertainties and assumptions associated with these forward-looking statements.
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OVERVIEW
Our Business, Industry and Target Market
We are a natural health and wellness company primarily engaged in the manufacture and sale of nutritional and personal care products. We are a Utah corporation with our principal place of business in Lehi, Utah, and sell our products to a sales force of independent consultants who use the products themselves or resell them to consumers.
Our independent consultants market and sell our products to customers and sponsor other independent consultants who also market our products to customers. Our sales are highly dependent upon the number and productivity of our independent consultants. Growth in sales volume generally requires an increase in the productivity of our independent consultants and/or growth in the total number of independent consultants. We seek to motivate and provide incentives to our independent consultants by offering high quality products and providing independent consultants with product support, training seminars, sales conventions, travel programs and financial incentives.
COVID-19
In or about December 2019, a novel strain of coronavirus, SARS-CoV-2 “COVID-19”, began aggressively spreading throughout the world, including all the primary markets where we conduct business. As COVID-19 has spread throughout the world, it has impacted our markets differently. At various times during the course of the pandemic and throughout our markets, governments have issued orders and restrictions that have limited the ability of our consultants to meet with consumers, put downward pressure on our sales in many of our markets and added substantial uncertainties to our global supply chain. Different variants of COVID-19 continue to arise and spread in various places around the world. We continue to take actions to mitigate the effects COVID-19 may have on our business, such actions may ultimately be insufficient to avoid substantial impact on the consolidated financial statement or material health of the Company. At this time, the duration of any business disruption and related financial impact cannot be reasonably estimated.
Eastern Europe
On February 24, 2022, Russian forces launched significant military action against Ukraine. There continues to be sustained conflict and disruption in the region, which is expected to endure for the foreseeable future. Our consultants in our Russia and Other market, a market within our Europe business segment that includes Russia, Ukraine, Belarus and other Common Independent States in the region, continue to operate their independent businesses, albeit at a reduced level than prior to the start of the conflict. For the year ended December 31, 2022, we have recorded a pretax charge of $1.0 million, primarily related to the impairment of inventory. We expect that this will continue to impact our business for the foreseeable future. We will continue monitoring the social, political, regulatory and economic environment in Ukraine and Russia, and will consider further actions as appropriate.
Net sales related to Russia and Other for the years ended December 31, 2022 and 2021, were $53.3 million and $61.4 million, respectively. Operating income related to Russia and Other for the years ended December 31, 2022 and 2021, were $2.9 million and $5.8 million, respectively, prior to the charges noted above. As of December 31, 2022, Russia and Other had assets of $6.8 million, net of working capital reserves related to inventories.
More broadly, there could be additional negative impacts to our net sales, earnings and cash flows should the situation escalate beyond its current scope, including, among other potential impacts, economic recessions in certain neighboring countries or globally due to inflationary pressures and supply chain cost increases or the geographic proximity of the war relative to the rest of Europe.
Inflation
In 2021, the inflation rate in the U.S. began to increase significantly. In 2022, the inflation rate increase accelerated and during 2022, was the highest in 40 years. Europe and other areas in which we do business are also experiencing higher levels of inflation. Our operations have been, and may continue to be, adversely impacted by inflation, primarily from higher costs of raw materials, labor, production, distribution and transportation costs.
In 2022, we experienced a decrease in our consolidated net sales of 5.0 percent (or an increase of 0.2 percent in local currencies) compared to 2021. Asia net sales increased approximately 5.3 percent (or 16.1 percent in local currencies) compared to 2021. Europe net sales decreased approximately 13.7 percent (or 9.9 percent in local currencies) compared to
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2021. North America net sales decreased approximately 11.0 percent (or 10.8 percent in local currencies) compared to 2021. Latin America and Other net sales decreased approximately 9.7 percent (or 8.9 percent in local currencies) compared to 2021. The strengthening of the U.S. dollar versus the local currencies, primarily in our Asian and European markets, resulted in an approximate 5.2 percent, or $23.1 million, decrease of our net sales during the year ended December 31, 2022.
Cost of sales increased $6.7 million during 2022, compared to the same period in 2021, and as a percentage of net sales were 29.0 percent and 26.0 percent for 2022 and 2021, respectively. The increase in cost of sales percentage is primarily due to changes in inventory valuation reserves, changes in market mix, heightened inflation, and increases in raw materials, production and transportation costs. For the year ended December 31, 2022, we had incremental valuation charges of $5.3 million related to inventory. Of that amount, $1.0 million related to the conflict between Russia and Ukraine, and $4.3 million related to changes in forecast demand and production issues, among other factors.
Selling, general and administrative expenses decreased $1.0 million during 2022, and as a percentage of net sales were 36.3 percent and 34.7 percent for 2022 and 2021, respectively. The dollar decrease was primarily related to lower service fees that resulted from a decline in China's net sales, lower expenses relating to declines in Russia and Other's net sales, and lower compensation, partially offset by increases in the expected level of convention and distributor events.
As an international business, we have significant sales and costs denominated in currencies other than the U.S. dollar. Sales in international markets denominated in foreign currencies are expected to continue to represent a substantial portion of our sales. Likewise, we expect foreign markets with functional currencies other than the U.S. dollar will continue to represent a substantial portion of our overall sales and related operating expenses. Accordingly, changes in foreign currency exchange rates could materially affect sales and costs or the comparability of sales and costs from period to period as a result of translating foreign markets financial statements into our reporting currency.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates and those differences could have a material effect on our financial position and results of operations. We have discussed the development, selection and disclosure of these estimates with the Board of Directors and our Audit Committee.
A summary of our significant accounting policies is provided in Note 1, “Nature of Operations and Significant Accounting Policies,” to our Consolidated Financial Statements, in Item 8, Part 2 of this report. We believe the critical accounting policies and estimates described below reflect our more significant estimates and assumptions used in the preparation of the consolidated financial statements. The impact and any associated risks on our business that are related to these policies are also discussed throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results.
Revenue Recognition
Our revenue recognition practices are discussed in Note 2, “Revenue Recognition,” to our Consolidated Financial Statements, in Item 8, Part 2 of this report.
Inventories
Inventories are adjusted to lower of cost and net realizable value, using the first-in, first-out method. The components of inventory cost include raw materials, labor and overhead. To estimate any necessary adjustments, various assumptions are made in regard to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning and market conditions. If future demand and market conditions are less favorable than our assumptions, additional inventory adjustments could be required.
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Incentive Trip Accrual
We accrue expenses associated with our direct sales program, which rewards independent consultants with paid attendance for incentive trips, including our conventions and meetings. Expenses associated with incentive trips are accrued over qualification periods as the trips are earned. We specifically analyze incentive trip accruals based on historical and current sales trends as well as contractual obligations when evaluating the adequacy of the incentive trip accrual. Actual results could generate liabilities in amounts greater or less than the amounts recorded. We had accrued incentive trip costs of approximately $5.8 million and $6.7 million at December 31, 2022 and 2021, respectively, which are included in accrued liabilities in the consolidated balance sheets.
Contingencies
We are involved in certain legal proceedings. When a loss is considered probable in connection with litigation or non-income tax contingencies and when such loss can be reasonably estimated, we recognize a liability within a best estimate range related to the contingency. If there is no best estimate, we record the minimum of the range. As additional information becomes available, we assess the liability related to the contingency and revise the estimate. Revisions in estimates of the liabilities could materially affect our results of operations in the period of adjustment. Contingencies are discussed in further detail in Note 11, “Commitments and Contingencies,” to our Consolidated Financial Statements, in Item 8, Part 2 of this report.
Income Taxes
Our income tax expense, deferred tax assets and liabilities and contingent reserves reflect our best assessment of estimated future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income, and are consistent with the plans and estimates that we are using to manage the underlying businesses. Valuation allowances are recorded as reserves against net deferred tax assets when it is determined that net deferred tax assets are not likely to be realized in the foreseeable future. As of December 31, 2022 and 2021, we had recorded valuation allowances of $18.0 million and $8.7 million, respectively, as offsets to deferred tax assets.
At December 31, 2022, foreign subsidiaries had unused operating loss carryovers for tax purposes of approximately $5.1 million. The net operating losses will expire at various dates from 2023 through 2034, with the exception of those in some foreign jurisdictions where there is no expiration. As of December 31, 2022, we had approximately $15.4 million of foreign tax and withholding credits. Of the $15.4 million credits, $15.0 million are foreign tax credits, most of which expire in 2024 and a portion of which are offset by valuation allowances.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
PRESENTATION
Net sales represents gross sales including shipping and handling offset by discounts and volume rebates given to independent consultants. Volume rebates as a percentage of retail sales may vary by country, depending upon regulatory restrictions that limit or otherwise restrict rebates. We also offer reduced volume rebates with respect to certain products and promotions worldwide.
Our gross profit consists of net sales less cost of sales, which represents our manufacturing costs, the price we pay to raw material suppliers and manufacturers of our products, and duties and tariffs, as well as shipping and handling costs related to product shipments and distribution to our independent consultants.
Volume incentives are a significant part of our direct sales marketing program, and represent commission payments made to our independent consultants. These payments are designed to provide incentives for reaching higher sales levels
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through their own sales and the sales of independent consultants in their sales organization. Volume incentives vary slightly, on a percentage basis, by product due to our pricing policies and commission plans in place in various operations.
Selling, general and administrative expenses represent operating expenses, components of which include labor and benefits, sales events, professional fees, travel and entertainment, consultant marketing, occupancy costs, communication costs, bank fees, independent service fees paid to independent service providers in China, depreciation and amortization, and other miscellaneous operating expenses.
Most of our sales to independent consultants outside the United States are made in the respective local currencies. In preparing our consolidated financial statements, sales are translated into U.S. dollars using average exchange rates. Additionally, the majority of our purchases from suppliers are generally made in U.S. dollars. Consequently, a strengthening of the U.S. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate transaction losses on intercompany payable balances in the local markets.
RESULTS OF OPERATIONS
The following table summarizes our consolidated net income (loss) from continuing operations results as a percentage of net sales for the periods indicated:
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2022 | 2021 | ||||
| Net sales | 100.0 | % | 100.0 | % | |
| Cost of sales | (29.0) | (26.0) | |||
| Gross profit | 71.0 | 74.0 | |||
| Operating expenses: | |||||
| Volume incentives | 30.9 | 31.5 | |||
| Selling, general and administrative | 36.3 | 34.7 | |||
| Operating income | 3.8 | 7.8 | |||
| Other income (expense): | |||||
| Interest and other income, net | — | 0.1 | |||
| Interest expense | (0.1) | (0.1) | |||
| Foreign exchange losses, net | (0.2) | (0.7) | |||
| (0.3) | (0.7) | ||||
| Income before provision for income taxes | 3.5 | 7.1 | |||
| Provision for income taxes | 3.5 | 0.4 | |||
| Net income (loss) | — | % | 6.7 | % |
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Net Sales
International operations have provided, and are expected to continue to provide, a significant portion of our total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, we present net sales excluding the impact of foreign exchange fluctuations. We compare the percentage change in net sales from one period to another period by excluding the effects of foreign currency exchange as shown below. Net sales excluding the impact of foreign exchange fluctuations is not a U.S. GAAP financial measure and removes from net sales in U.S. dollars the impact of changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period. We believe presenting the impact of foreign currency fluctuations is useful to investors because it allows a more meaningful comparison of net sales of our foreign operations from period to period. However, net sales excluding the impact of foreign currency fluctuations should not be considered in isolation or as an alternative to net sales in U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Year Ended December 31, 2022, as Compared to the Year Ended December 31, 2021
Net Sales
The following table summarizes the changes in net sales by operating segment with a reconciliation to net sales, excluding the impact of currency fluctuations, for the years ended December 31, 2022 and 2021 (dollar amounts in thousands).
| Net Sales by Operating Segment | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Percent Change | Impact of Currency Exchange | Percent Change Excluding Impact of Currency | |||||||||||||
| Asia | $ | 186,292 | $ | 176,860 | 5.3 | % | $ | (19,046) | 16.1 | % | |||||||
| Europe | 78,991 | 91,539 | (13.7) | % | (3,503) | (9.9) | % | ||||||||||
| North America | 133,214 | 149,746 | (11.0) | % | (385) | (10.8) | % | ||||||||||
| Latin America and Other | 23,413 | 25,939 | (9.7) | % | (208) | (8.9) | % | ||||||||||
| $ | 421,910 | $ | 444,084 | (5.0) | % | $ | (23,142) | 0.2 | % |
Consolidated net sales for the year ended December 31, 2022, were $421.9 million compared to $444.1 million in 2021, or a decrease of approximately 5.0 percent. The decrease was related to product sales declines in our Europe, North America, and Latin America and Other operating segments. Excluding the unfavorable impact of foreign currency exchange rate fluctuations, consolidated net sales for the year ended December 31, 2022 would have increased by 0.2 percent from 2021.
Asia
Net sales related to Asia for the year ended December 31, 2022, were $186.3 million compared to $176.9 million for 2021, an increase of 5.3 percent. In local currency, net sales increased by 16.1 percent compared to 2021. Fluctuations in foreign exchange rates had a $19.0 million unfavorable impact on net sales for the year ended December 31, 2022.
Notable activity in the following markets contributed to the results of Asia:
In our South Korea market, net sales decreased approximately $6.2 million, or 10.1 percent, for the year ended December 31, 2022, compared to 2021. Fluctuations in foreign exchange rates had a $6.9 million unfavorable impact on net sales for the year ended December 31, 2022. In local currency, net sales increased 1.2 percent compared to 2021. The increase in local currency net sales was primarily the result of product promotions intended to stimulate activity as well as an increase in demand for nutritional supplements.
In our Taiwan market, net sales increased approximately $25.3 million, or 109.0 percent, for the year ended December 31, 2022, compared to 2021. Fluctuations in foreign exchange rates had a $3.1 million unfavorable impact on net sales for the year ended December 31, 2022. In local currency, net sales increased 122.4 percent for the year ended
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December 31, 2022, compared to 2021. We attribute the growth in net sales primarily to product promotions intended to stimulate activity as well as an increase in demand for nutritional supplements.
In our Japan market, net sales increased approximately $3.2 million, or 8.8 percent, for the year ended December 31, 2022, compared to 2021. Fluctuations in foreign exchange rates had a $7.4 million unfavorable impact on net sales for the year ended December 31, 2022. In local currency, net sales increased 29.4 percent for the year ended December 31, 2022, compared to 2021. We attribute the growth in net sales primarily to product promotions intended to stimulate activity as well as an increase in demand for nutritional supplements.
In our China market, net sales decreased approximately $8.9 million, or 18.3 percent, for the year ended December 31, 2022, compared to 2021. Fluctuations in foreign exchange rates had a $1.4 million unfavorable impact on net sales for the year ended December 31, 2022. In local currency, net sales decreased 15.5 percent for the year ended December 31, 2022, compared to 2021. The decrease in net sales was primarily the result of additional government restrictions in the market intended to slow the spread of COVID-19, which included lockdowns during various parts of the year ended December 31, 2022.
Europe
Net sales related to Europe were $79.0 million for the year ended December 31, 2022, compared to $91.5 million for 2021, an decrease of 13.7 percent. The functional currency for many of these markets is the U.S. dollar which reduces the effect from foreign currency fluctuations. Fluctuations in foreign exchange rates had a $3.5 million unfavorable impact on net sales for the year ended December 31, 2022. Net sales decreased primarily as a result of conflict between Russia and Ukraine which has placed significant financial pressures on the surrounding Western and Eastern Europe markets, and customer sensitivity due to inflationary pressures, among other factors.
North America
Net sales related to North America for the year ended December 31, 2022, were $133.2 million, compared to $149.7 million for 2021, a decrease of 11.0 percent. Fluctuations in foreign exchange rates had a $0.4 million unfavorable impact on net sales for the year ended December 31, 2022. Excluding the impact of fluctuations in foreign exchange rates, local currency net sales in North America decreased by 10.8 percent from 2021.
In the United States, net sales decreased $15.3 million, or 11.1 percent, for the year ended December 31, 2022, compared to 2021. The decrease in sales was due primarily to a reduction in the average order size attributed to customer sensitivity due to inflationary pressures, among other factors.
Latin America and Other
Net sales related to Latin America and Other markets for the year ended December 31, 2022, were $23.4 million, compared to $25.9 million for 2021, a decrease of 9.7 percent. Fluctuations in foreign exchange rates had a $0.2 million unfavorable impact on net sales for the year ended December 31, 2022. Excluding the impact of fluctuations in foreign exchange rates, local currency net sales in Latin America and Other decreased by 8.9 percent from 2021. The decrease in sales was due primarily to a reduction in the average order size attributed to customer sensitivity due to inflationary pressures, among other factors.
Further information related to our Asia, Europe, North America, and Latin America and Other business segments is set forth in Note 12, “Operating Business Segment and International Operation Information,” to our Consolidated Financial Statements, in Item 8, Part 2 of this report.
Cost of Sales
Cost of sales as a percent of net sales increased to 29.0 percent in 2022, compared to 26.0 percent in 2021. The increase in cost of sales percentage is primarily due to changes in inventory valuation reserves as a result of the conflict between Russia and Ukraine, as well as reserves for other markets, changes in market mix, persistent inflation, unfavorable exchange rates, and increases in raw materials, production and transportation costs. For the year ended December 31, 2022, we had incremental valuation charges of $5.3 million related to inventory. Of that amount, $1.0 million related to the conflict between Russia and Ukraine, and $4.3 million related to changes in forecast demand and production issues, among other factors.
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Volume Incentives
Volume incentives as a percent of net sales decreased to 30.9 percent in 2022, compared to 31.5 percent in 2021. These payments are designed to provide incentives for reaching higher sales levels. Volume incentives vary slightly, on a percentage basis, by product due to pricing policies and commission plans in place in the various operations. We do not pay volume incentives in China, instead we pay independent service fees, which are included in selling, general and administrative expenses. Volume incentives as a percentage of net sales can fluctuate based on promotional activity and mix of sales by market. The decrease in volume incentives as a percent of net sales for the year ended December 31, 2022 is primarily due to changes in market mix, reflecting growth in markets where volume incentives as a percentage of net sales are lower than the consolidated average, and reflects cost savings from the September 2020 launch of our new consultant sales and compensation plan in North America and Latin America and Other.
Selling, General and Administrative Expenses
Selling, general and administrative expenses represent operating expenses, components of which include labor and benefits, sales events, professional fees, travel and entertainment, marketing, occupancy costs, communications costs, bank fees, depreciation and amortization, independent services fees paid in China, and other miscellaneous operating expenses.
Selling, general and administrative expenses decreased by $1.0 million to $153.1 million for the year ended December 31, 2022. Selling, general and administrative expenses were 36.3 percent and 34.7 percent of net sales for the years ended December 31, 2022 and 2021, respectively. The dollar decrease was primarily related to lower service fees that resulted from a decline in China's net sales, lower expenses relating to declines in Russia and Other's net sales, and lower compensation expense, partially offset by increases in consultant events, promotions and marketing.
Other Income (Loss), Net
Other income (loss), net, for the years ended December 31, 2022 and 2021, were losses of $1.0 million and $2.8 million, respectively. Other income (loss), for the year ended December 31, 2022 primarily consisted of foreign exchange gains and losses as a result of net changes in foreign currencies primarily in Asia and Europe.
Income Taxes
Our effective tax rate was 96.4 percent for 2022 compared to 5.1 percent for 2021. The increase in the effective rate from 2021 to 2022 is primarily attributable to recording a valuation allowance against deferred tax assets for which we do not expect to receive a benefit. The effective rate for 2022 differed from the federal statutory rate of 21.0 percent primarily due to the following:
•Adjustments to valuation allowances increased the effective rate by 64.3 percent in 2022. Included was the effect of recording a valuation allowance on foreign tax credits which are not expected to be utilized before expiration along with the impact of current year foreign losses in foreign affiliates that currently do not provide tax benefit.
•Adjustments related to operations in foreign countries which are treated as a branch for US tax purposes increased the effective tax rate by 13.1 percent in 2022.
•Cumulative unfavorable adjustments related to foreign operations increased the tax rate by 4.3 percent in 2022. These adjustments relate to foreign items that are treated differently for tax purposes than they are for financial reporting purposes.
•Adjustments relating to the U.S. tax impact of foreign operations decreased the effective tax rate by 8.6 percentage points in 2022. The components of this calculation were:
| Components of U.S. tax impact of foreign operations | 2022 | ||
|---|---|---|---|
| Foreign tax credits | (19.4) | % | |
| Foreign tax rate differentials | 1.5 | ||
| Foreign withholding taxes | 2.6 | ||
| Transfer pricing adjustment | 1.2 | ||
| Impact of Subpart F | 1.8 | ||
| Impact of GILTI | 3.7 | ||
| Impact of FDII | — | ||
| Total | (8.6) | % |
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Changes to the effective rate due to impact of foreign tax credits, foreign tax rate differentials, foreign withholding taxes, transfer pricing, Subpart F, GILTI and FDII are expected to be recurring; however, depending on various factors, the changes may be favorable or unfavorable for a particular period. Given the large number of jurisdictions in which we do business and the number of factors that can impact effective tax rates in any given year, this rate is likely to reflect significant fluctuations from year-to-year.
Year Ended December 31, 2021, as Compared to the Year Ended December 31, 2020
For a discussion regarding our financial condition and results of operations for fiscal 2021 compared to fiscal 2020, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filled with the SEC on March 8, 2022.
LIQUIDITY AND CAPITAL RESOURCES
Our principal use of cash is to pay for operating expenses and costs, including volume incentives, inventory and raw material purchases, capital assets and funding of international expansion. As of December 31, 2022, working capital was $83.9 million, compared to $88.0 million as of December 31, 2021. At December 31, 2022, we had $60.0 million in cash and cash equivalents, of which $51.2 million was held in our foreign markets and may be subject to various withholding taxes and other restrictions related to repatriations.
Our net consolidated cash inflows (outflows) are as follows (in thousands):
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| Operating activities | $ | 710 | $ | 34,608 | ||
| Investing activities | (7,628) | (6,612) | ||||
| Financing activities | (16,246) | (31,721) |
Operating Activities
For the year ended December 31, 2022, operating activities provided cash in the amount of $0.7 million compared to $34.6 million in 2021. Operating cash flows decreased primarily due to lower gross margins and the timing of payments for accounts payable, accrued liabilities, accrued volume incentives and service fees, deferred revenue and receipts of accounts receivable payments.
Investing Activities
Cash used in investing activities includes cash paid for capital expenditures related to the purchase of equipment, computer systems and software. For the years ended December 31, 2022 and 2021, these amounts were $7.6 million and $6.7 million, respectively.
Financing Activities
For the year ended December 31, 2022, financing activities used $16.2 million in cash, compared to $31.7 million in cash used for the same period in 2021. Financing cash flows increased primarily due to a special dividend declared in 2021 that did not reoccur during the year ended December 31, 2022. For the years ended December 31, 2022 and 2021, we had $0 of net borrowings.
For the year ended December 31, 2022, we used cash to repurchase 909,000 shares of our common stock under the share repurchase program for $13.6 million. At December 31, 2022, the remaining balance available for repurchases under the program was $24.0 million.
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On July 11, 2017, we entered into a revolving credit agreement with Bank of America, N.A., with a borrowing limit of $25.0 million (the “Credit Agreement”). On June 23, 2022 the credit agreement was amended to extend the term to mature on July 1, 2027 and allows for additional borrowings of $25.0 million or up to three separate increases of no less than $5.0 million each, subject to the lender's due diligence. The amendment to the credit agreement also modified the calculation of interest. Interest under the amended Credit Agreement is the greater of BSBY Daily Floating Rate or the Index Floor, plus 1.50 percent (5.87 percent as of December 31, 2022), and an annual commitment fee of 0.25 percent on the unused portion of the commitment. At December 31, 2022, there was no outstanding balance under the Credit Agreement.
The Credit Agreement contains customary financial covenants, including financial covenants relating to our solvency and leverage. In addition, the Credit Agreement restricts certain capital expenditures, lease expenditures, other indebtedness, liens on assets, guarantees, loans and advances, dividends, mergers, consolidations and transfers of assets except as permitted in the Credit Agreement. The Credit Agreement is collateralized by our manufacturing facility, accounts receivable balance, inventory balance and other assets. We were in compliance with the debt covenants set forth in the Credit Agreement as of December 31, 2022.
On April 21, 2020, we entered into a credit agreement with Banc of America Leasing and Capital, LLC, with a borrowing limit of $6.0 million (the “Capital Credit Agreement”). On November 19, 2020, we executed on the Capital Credit Agreement and borrowed $3.7 million. We do not expect to make any additional borrowings under the Capital Credit Agreement. We pay interest on any borrowings under the Capital Credit Agreement at a fixed rate of 3.00 percent and are required to settle our borrowings under the Capital Credit Agreement in thirty-six monthly payments, each equal to $0.1 million. The Capital Credit Agreement is collateralized by any new equipment purchased under the agreement. As of December 31, 2022, there was $1.2 million outstanding balance under the Capital Credit Agreement, $1.2 million of which was classified as current.
During the years ended December 31, 2022 and 2021, there were no additional borrowings made by our joint venture from the Company or its joint venture partner. The note between the joint venture and the Company eliminates in consolidation. In March 2022, the outstanding principal and interest amounts were repaid.
We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including capital expenditures, on both a short- and long-term basis.
In addition, other things such as a prolonged economic downturn, a decrease in demand for our products, an unfavorable settlement of our unrecognized tax positions or non-income tax contingencies could adversely affect our long-term liquidity.
CONTRACTUAL OBLIGATIONS
The following table summarizes information about contractual obligations as of December 31, 2022 (in thousands):
| Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating lease obligations | $ | 19,932 | $ | 4,936 | $ | 7,644 | $ | 4,768 | $ | 2,584 | ||||||||
| Self-insurance reserves (1) | 562 | 562 | — | — | ||||||||||||||
| Other long-term liabilities reflected on the balance sheet (2) | 702 | — | — | — | 702 | |||||||||||||
| Unrecognized tax benefits(3) | 209 | — | — | — | 209 | |||||||||||||
| Revolving credit facility (4) | — | — | — | — | — | |||||||||||||
| Capital credit agreement (5) | 1,174 | 1,174 | — | — | — | |||||||||||||
| Total | $ | 22,579 | $ | 6,672 | $ | 7,644 | $ | 4,768 | $ | 3,495 |
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(1) At December 31, 2022, there were $1.1 million of liabilities. We retain a significant portion of the risks associated with certain employee medical benefits and product liability insurance. Recorded liabilities for self-insured risks are calculated using actuarial methods and are not discounted. Amounts for self-insurance obligations are included in accrued liabilities and long-term other liabilities on the consolidated balance sheet.
We maintain product liability coverage to cover possible claims, and still maintain accruals for periods prior to obtaining coverage. Prior to this, we accrued $0.3 million that we believe is sufficient to cover probable and reasonably estimable liabilities related to product liability claims based on our history of such claims. However, there can be no assurance that these estimates will prove to be sufficient, nor can there be any assurance that the ultimate outcome of any litigation for product liability will not have a material negative impact on our business prospects,
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financial position, results of operations or cash flows. Because of the high degree of uncertainty regarding the timing of future cash outflows associated with the product liability obligations, we are unable to estimate the years in which cash settlement may occur.
(2) At December 31, 2022, there were $0.7 million of liabilities. We provide a nonqualified deferred compensation plan for our officers and certain key employees. Under this plan, participants may defer up to 100 percent of their annual salary and bonus (less the participant’s share of employment taxes). The deferrals become an obligation owed to the participant by us under the plan. Upon separation of the participant from the service with us, the obligation owed to the participant under the plan will be paid as a lump sum or over a period of either three or five years. As we cannot easily determine when our officers and key employees will separate from us, we are unable to estimate the years in which cash settlement may occur.
(3) At December 31, 2022, there were $0.2 million of liabilities. Because of the high degree of uncertainty regarding the timing of future cash outflows associated with these liabilities, if any, we are unable to estimate the years in which cash settlement may occur with the respective tax authorities.
(4) We entered into the revolving Credit Agreement with Bank of America, N.A., that permits us to borrow up to $25.0 million through July 1, 2027, bearing interest at the greater of BSBY Daily Floating Rate or the Index Floor, plus 1.50 percent. We must pay an annual commitment fee of 0.25 percent on the unused portion of the commitment. At December 31, 2022, we had $25.0 million available under this facility. At December 31, 2022, there was no outstanding balance under the Credit Agreement.
(5) We entered into the Capital Credit Agreement with Banc of America Leasing and Capital, LLC, under which we borrowed $3.7 million, bearing interest at a fixed rate of 3.00 percent. We are required to settle our borrowings over thirty-six monthly payments, each equal to $0.1 million. As of December 31, 2022, there was $1.2 million outstanding balance under the Capital Credit Agreement.
We have entered into long-term agreements with third-parties in the ordinary course of business, in which we have agreed to pay a percentage of net sales in certain regions in which we operate, or royalties on certain products. In 2022 and 2021, the aggregate amounts of these payments were $12,000 and $26,000, respectively.