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FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K, IN PARTICULAR “ITEM 1. BUSINESS” AND “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT REPRESENT OUR CURRENT EXPECTATIONS AND BELIEFS. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT ARE “FORWARD-LOOKING STATEMENTS” FOR PURPOSES OF FEDERAL AND STATE SECURITIES LAWS AND INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS OF MANAGEMENT’S EXPECTATIONS REGARDING OUR PERFORMANCE, INITIATIVES, STRATEGIES, PRODUCTS, INGREDIENTS, PRODUCT INTRODUCTIONS AND OFFERINGS, PRODUCT SOURCING, GROWTH, ACQUISITIONS AND ACQUIRED COMPANIES’ PERFORMANCE, GLOBAL ECONOMIC CONDITIONS, OPPORTUNITIES AND RISKS; STATEMENTS OF PROJECTIONS REGARDING FUTURE SALES, EXPENSES, OPERATING RESULTS, TAXES AND DUTIES, CAPITAL EXPENDITURES, SOURCES AND USES OF CASH, FOREIGN-CURRENCY FLUCTUATIONS OR DEVALUATIONS, REPATRIATION OF UNDISTRIBUTED EARNINGS, AND OTHER FINANCIAL ITEMS; STATEMENTS OF MANAGEMENT’S EXPECTATIONS, PLANS AND BELIEFS REGARDING OUR MARKETS, SALES FORCE, SALES COMPENSATION PLAN AND CUSTOMER BASE; STATEMENTS REGARDING THE PAYMENT OF FUTURE DIVIDENDS AND STOCK REPURCHASES; STATEMENTS REGARDING THE OUTCOME OF LITIGATION, AUDITS, INVESTIGATIONS AND OTHER LEGAL MATTERS;MATTERS, INCLUDING GOVERNMENT POLICIES AND REGULATIONS IN MAINLAND CHINA; ACCOUNTING ESTIMATES AND ASSUMPTIONS; STATEMENTS OF BELIEF; AND STATEMENTS OF ASSUMPTIONS UNDERLYING ANY OF THE FOREGOING. IN SOME CASES, YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS “BELIEVE,” “EXPECT,” “PROJECT,” “ANTICIPATE,” “ESTIMATE,” “COMMIT,” “INTEND,” “PLAN,” “TARGETS,” “LIKELY,” “WILL,” “WOULD,” “COULD,” “MAY,” “MIGHT,” THE NEGATIVE OF THESE WORDS AND OTHER SIMILAR WORDS. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY LAW. WE CAUTION AND ADVISE READERS THAT THESE STATEMENTS ARE BASED ON ASSUMPTIONS THAT MAY NOT BE REALIZED AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS AND BELIEFS CONTAINED HEREIN. FOR A SUMMARY OF THESE RISKS, SEE “ITEMITEM 1A. RISK FACTORS.”
In this Annual Report on Form 10-K, references to “dollars” and “$” are to United StatesU.S. dollars.
Nu Skin, Pharmanex and ageLOC are our trademarks. The italicized product names used in this Annual Report on Form 10-K are product names and also, in certain cases, our trademarks.
In addition to our core Nu Skin business, we also explore new areas of growth and opportunity through our strategic investment arm known as Rhyz Inc. Rhyz investments include personal carebeauty and nutritionalwellness product manufacturing companies and indoor-growing technologies, which are sometimes referred to as controlled-environment agriculture.other investments. In 2019,2022, the Rhyz companies generated $122.0$153.3 million, or 7%, of our 20192022 reported revenue (excluding sales to our core Nu Skin business), substantially all of which was from the manufacturing companies..
Our operations are subject to various laws and regulations globally, particularly with respect to our product categories and our distribution channel. See Item 1A. Risk Factors for a more detailed description of the risks associated with our business.
We offer a branded, differentiated product portfolio. We believe our innovative approach to product development and distribution provides us with a competitive advantage in personal carebeauty and nutritionalwellness products and direct selling. We believe that our acquired and licensed technologies, manufacturing and innovation facilities, research collaborations and in-house research expertise enable us to introduce innovative, proprietary products. We seek to offer products that are demonstrable and well suited for social sharing. Sustainability is also an important part of our product strategy; we take sustainability into account as we formulate our products, and we have an ongoing initiative to transition to packaging that is recycled, recyclable, reusable, reduced or renewable.
Beginning in the second half of 2021 and continuing into 2022, we launched our Beauty Focus Collagen+ skin care supplement and our ageLOC Meta nutritional supplement that helps support metabolic health.
During the past several years, we have generated success in our business with innovative beauty devices. Devices are an important part of our strategy. In the second half of 2022, we began launching our first connected beauty device, ageLOC LumiSpa iO. We plan to launch additional connected devices in the coming years, including a new connected body device in most of our markets during 2023. These devices will gather data to provide insights into consumer behavior, with the goal of enabling us to provide more personalized experiences for our consumers. Please refer to “Distribution Channel” below for additional information about our connected devices and our business strategy that they fit into.
Product Categories
We have two primary product categories: personal carebeauty products and wellness products. We develop and distribute innovative, premium-quality products in these two categories under our Nu Skin and Pharmanex brands, respectively. We also develop and distribute products under our ageLOC brand, which features innovative, premium-quality anti-aging products in both the personal carebeauty and wellness categories and in many cases is co-branded with our Nu Skin and Pharmanex products. We also offer products under other brands, including personal care products thatOur innovative beauty devices are conducive to social sharing, such as cosmetics and other socially demonstrable and shareableamong our ageLOC beauty products.
Presented below are the U.S. dollar amounts and associated revenue percentages from the sale of personal carebeauty and wellness products, as well as our Rhyz companies, for the years ended December 31, 2019, 2018 and 2017.last three years. This table should be read in conjunction with the information presented in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, which discusses the factors impacting revenue trends and the costs associated with generating the aggregate revenue presented.
Revenue by Product Category
(U.S. dollars in millions)(1)
| Year Ended December 31, | ||||||||||||||||||||||||
| Product Category | 2019 | 2018 | 2017 | |||||||||||||||||||||
Personal Care(2) | $ | 1,423.5 | 58.8 | % | $ | 1,659.7 | 62.0 | % | $ | 1,456.4 | 63.9 | % | ||||||||||||
Wellness(2) | 863.1 | 35.7 | % | 921.3 | 34.4 | % | 817.2 | 35.9 | % | |||||||||||||||
Other(3) | 133.8 | 5.5 | % | 98.0 | 3.6 | % | 5.5 | 0.2 | % | |||||||||||||||
| $ | 2,420.4 | 100.0 | % | $ | 2,679.0 | 100.0 | % | $ | 2,279.1 | 100.0 | % | |||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| Product Category | 2022 | 2021 | 2020 | |||||||||||||||||||||
Beauty(1) | $ | 1,069.7 | 48.1 | % | $ | 1,442.7 | 53.5 | % | $ | 1,491.8 | 57.8 | % | ||||||||||||
Wellness(1) | 992.3 | 44.6 | % | 1,062.5 | 39.4 | % | 922.6 | 35.7 | % | |||||||||||||||
Other(2) | 163.7 | 7.3 | % | 190.5 | 7.1 | % | 167.5 | 6.5 | % | |||||||||||||||
| $ | 2,225.7 | 100.0 | % | $ | 2,695.7 | 100.0 | % | $ | 2,581.9 | 100.0 | % | |||||||||||||
| (1) |
| Includes sales of |
| Other includes the external revenue from our Rhyz companies along with a limited number of other products and services, including household products and technology services. |
Product Development
We are committed to developing and marketing innovative products. We have several products in development, including next-generation skin care products and nutritional supplements. In our research and product development, we leverage the three disciplines of science, technology and sourcing to create innovative products that address consumer needs. We also develop and offer products that are conducive to social sharing, including cosmetics and other socially demonstrable and shareable products.
Our research and product development activities include:
| ● | Global consumer research to identify needs and insights and refine product concepts; |
| ● | Internal research, product development and quality testing; |
| ● | Joint research projects, collaborations and clinical studies; |
| ● | Identification and assessment of technologies for potential licensing arrangements; and |
| ● | Acquisition of technologies. |
We maintain research and product development facilities in the United States and Mainland China. We also contract with third parties for clinical studies and collaborate on basic research projects with researchers from universities and other research institutions in the United States and Asia, whose staffs include scientists with basic research expertise in, among others, natural product chemistry, biochemistry, dermatology, nutrition, pharmacology and clinical studies.
We also work to identify and assess innovative technologies developed by third parties for potential licensing, supply or acquisition arrangements. Because of the nature of our distribution channel, which allows us to provide a high level of product information on a person-to-person basis, we often have third parties who are interested in licensing innovative technologies to us to incorporate into our products and commercialize through our distribution channel. Licensing arrangements allow us to leverage the research activities of third parties that have resulted inprovided demonstrated technologies, clinical support and/or proprietary innovation, without all of the upfront costs and uncertainty associated with internal development. We have also invested in acquisitions to supplement our research capabilities and to acquire technologies, including our acquisition of Pharmanex in 1998; the license and acquisition of the technology underlying our BioPhotonic Scanner, a non-invasive tool that measures the level of carotenoid anti-oxidants in skin, in the early 2000s; and the acquisition of assets related to the genetic sources of aging from LifeGen Technologies, LLC in 2011. We incur expenses for royalties and amortization for previous technology-related acquisitions.technologies.
Intellectual Property
Our major trademarks are registered in the United States and in each marketmarkets where we operate or have plans to operate, and we consider trademark protection to be very important to our business. Our major trademarks include Nu Skin®, our fountain logos, Pharmanex®, ageLOC®, LifePak®, Galvanic Spa®, TR90®, Epoch®, ageLOC Me®, LumiSpa® and LumiSpa®ageLOC Boost®. In addition, a number of our products, including our facial spas, ageLOC Body Spa, LumiSpa, ageLOC Boost, TR90 and Pharmanex BioPhotonic Scanner, are based on proprietary technologies and designs, some of which areutilize patented technologies and/or technologies licensed from third parties. We also rely on patentspatent and trade secret protection to protect our proprietary formulastechnology and other proprietary information for some of our ageLOC products and other products.
Sourcing and Production
For markets other than Mainland China, in 2019,2022, we sourced most of our personal care productsbeauty and wellness products from trusted third-party suppliers and manufacturers.manufacturers, and approximately 23% from our manufacturing subsidiaries. Our manufacturing entities also provide a cost of goods sold benefit and help us to maintain a more consistent supply source. In Mainland China, we operate manufacturing facilities where we produce the majority of our personal carebeauty and wellness products and nutritional supplements sold in Mainland China. We also produce some products at these facilities that are exported to other markets.
We operate in the direct selling channel, primarily utilizing person-to-person marketing to promote and sell our products. We supportbelieve that direct selling, which has traditionally relied on face-to-face, word-of-mouth marketing, is currently being impacted by the convergence of social commerce, influencer and affiliate marketing, and the growing gig economy. These macroeconomic shifts have also disrupted traditional advertising and retail business practices, as well as e-commerce generally, in favor of socially enabled and direct-to-consumer models. The COVID-19 pandemic further accelerated disruption across many industries by causing migration to remote work and online shopping.
We endeavor to transform and adapt our business to these personal marketing efforts with marketing content, events, websites,trends by helping our sales force to become more socially enabled and to grow their businesses online. We are currently working through a significant digital transformation in our business to achieve widespread adoption of social commerce in all of our markets. This transformation involves the development of new and enhanced digital tools for our Sales Leaders and consumers, including new digital apps and other technology solutions. an improved website design and functionality. Our products also have served an important role in our social commerce strategy as we have developed products that are shareable and demonstrable on social media platforms. Products continue to play an important role as we transform to a more digital and socially enabled business; in particular, we believe that connected devices will provide data on consumer behaviors and needs that will engender a more personalized experience for our consumers and improved brand loyalty.
Our digital transformation will require significant expenditures over the next several years. It and social sharing also present certain risks and challenges to our business, and some social media platforms impose restrictions or prohibitions on content related to multi-level marketing. For further information, see Item 1A. Risk Factors.
We believe our direct selling distribution channel is an effective vehicle to distribute our products because:
| ● | our sales force has rapid reach to potential customers through their social networks and the social networks of those to whom they are connected; |
| ● | our sales force can personally educate and share company content with consumers about our products, which we believe is more effective for differentiating our products than using traditional mass-media advertising; |
| ● | our distribution channel allows for personalized product demonstrations and trial by potential consumers; |
| ● | our distribution channel allows our sales force to provide personal testimonials of product efficacy; |
| ● | as compared to other distribution methods, our sales force has the opportunity to provide consumers higher levels of |
| ● | as compared to other distribution methods, our sales force knows their customers and can foster loyalty through data-driven customer-relationship management and our subscription program. |
While our person-to-person marketing philosophy remains consistent globally, various aspects of our business may differ from market to market, including product mix and pricing, customer type mix, the manner and tools used to engage potential customers, social media and third-party platforms, compensation structure, the manner and tools used to engage potential affiliates (including programs and incentives), access to distribution outlets or product stores, the manner of getting products to consumers, product claims, branding and product formulations. In addition, in Mainland China we have implemented a business model that, unlike the business model we use in our other markets, utilizes retail stores, sales employees, independent direct sellers and independent marketers to market our products.
Given that members of our sales force are independent contractors in most markets, we do not control or direct their promotional efforts. We do, however, require that our sales force abide by policies and procedures that require them to act in an ethical and consumer-protective manner and in compliance with applicable laws and regulations. As a member of direct selling associations globally, we promote and abide by the industry’s codes of ethics and consumer-protective standards to support and protect those who sell and purchase our products through the direct selling channel.
In all of our markets besides Mainland China, we refer to members of our independent sales force as “Brand Affiliates” because their primary role is to promote our brand and products through their personal and social networks.
Consumer Group and Sales Network
Our distribution channel is composed of two primary groups: our consumer group—individuals who buy our products primarily for personal or family consumption and share products with friends and family; and our sales network—individuals who personally buy, use and resell products, and who also findattract new consumers, and recruit, train and develop new sellers. We strive to develop both our consumer group and our sales network. Our strategy for growing our consumer group is to offer high-quality, personalized, innovative products that provide demonstrable benefits. Our strategy for growing our sales network is to provide a meaningful business opportunity for those persons who demonstrate the desire and ability to develop both a consumer group and a team of sellers, including through sales compensation, incentives and recognition.
To monitor the growth trends in our consumer group, we track the number of persons who purchased products directly from the company during the previous three months (“Customers”). Our Customer numbers include members of our sales force who made such a purchase, including Paid Affiliates and those who qualify as Sales Leaders, but they do not include consumers who purchase directly from members of our sales force. We believe a significant majority of Customers purchase our products primarily for personal or family consumption but are not actively pursuing the opportunity we offer to generate supplemental income by actively and consistently marketing and reselling products. Our Customer numbers do not include consumers who purchase products directly from members of our sales force.
To monitor the growth in our sales network, we track the number of independent distributors,Paid Affiliates and sales employees and independent marketers in Mainland China, who achieve certain qualification requirements (“Sales Leaders”). Leaders, which are defined as follows:
| ● | “Paid Affiliates” are any Brand Affiliates, as well as members of our sales force in Mainland China, who earned sales compensation during the previous three months. As we continue to focus on customer acquisition, our Paid Affiliates, who primarily share products, are a bridge to attracting new customers and nurturing relationships and community. Paid Affiliates power our social commerce model and are an important indicator of consumer purchasing activity in our business. |
| ● | “Sales Leaders” are the three-month average of our monthly Brand Affiliates, as well as sales employees and independent marketers in Mainland China, who achieved certain qualification requirements as of the end of each month of the quarter. |
The following chart sets forth information concerning our Customers, Paid Affiliates and Sales Leaders for the last three years. During the first quarter of 2022, in connection with the introduction of the new metric Paid Affiliates, we reviewed how we define Sales Leaders and adjusted this metric’s definition to what we believe provides a better insight into the trends of our business. We have recast the 2020 and 2021 Sales Leaders to the new definition. The definition of our Customer metric remained unchanged.
Total Number of Customers, Paid Affiliates and Sales Leaders(1) by Region
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2017 | Three Months Ended December 31, | |||||||||||||||||||||||||||||||||
| Customers | Sales Leaders | Customers | Sales Leaders | Customers | Sales Leaders | |||||||||||||||||||||||||||||||
| Customers | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Americas | 299,287 | 336,564 | 366,688 | |||||||||||||||||||||||||||||||||
| Mainland China | 292,812 | 17,987 | 303,789 | 33,129 | 192,604 | 40,610 | 202,933 | 315,418 | 381,460 | |||||||||||||||||||||||||||
| Americas/Pacific | 220,216 | 7,607 | 248,609 | 8,354 | 244,467 | 8,871 | ||||||||||||||||||||||||||||||
| Southeast Asia/Pacific | 141,183 | 169,601 | 192,622 | |||||||||||||||||||||||||||||||||
| South Korea | 168,972 | 7,251 | 182,026 | 7,565 | 172,553 | 8,431 | 123,749 | 146,354 | 158,953 | |||||||||||||||||||||||||||
| Southeast Asia | 136,349 | 7,480 | 153,465 | 8,933 | 121,764 | 8,020 | ||||||||||||||||||||||||||||||
| Japan | 125,557 | 5,916 | 130,181 | 5,916 | 132,041 | 6,592 | 119,152 | 122,813 | 128,400 | |||||||||||||||||||||||||||
| EMEA | 153,330 | 4,619 | 149,085 | 4,791 | 135,051 | 4,683 | 197,917 | 210,414 | 258,587 | |||||||||||||||||||||||||||
| Hong Kong/Taiwan | 65,669 | 3,900 | 76,891 | 4,767 | 71,091 | 4,671 | 62,903 | 66,395 | 70,592 | |||||||||||||||||||||||||||
| Total | 1,162,905 | 54,760 | 1,244,046 | 73,455 | 1,069,571 | 81,878 | 1,147,124 | 1,367,559 | 1,557,302 | |||||||||||||||||||||||||||
Three Months Ended December 31, | ||||||||||||
| Paid Affiliates | 2022 | 2021 | 2020 | |||||||||
| Americas | 42,633 | 49,328 | 52,821 | |||||||||
| Mainland China | 23,436 | 30,546 | 48,266 | |||||||||
| Southeast Asia/Pacific | 38,653 | 44,050 | 48,756 | |||||||||
| South Korea | 45,058 | 52,036 | 52,526 | |||||||||
| Japan | 38,021 | 38,428 | 38,973 | |||||||||
| EMEA | 31,869 | 36,482 | 40,553 | |||||||||
| Hong Kong/Taiwan | 17,286 | 20,155 | 18,861 | |||||||||
| Total | 236,956 | 271,025 | 300,756 | |||||||||
Three Months Ended December 31, | ||||||||||||
| Sales Leaders | 2022 | 2021 | 2020 | |||||||||
| Americas | 9,594 | 10,879 | 13,252 | |||||||||
Mainland China(1) | 12,359 | 18,207 | 24,560 | |||||||||
| Southeast Asia/Pacific | 6,999 | 8,800 | 10,167 | |||||||||
| South Korea | 6,094 | 8,224 | 7,358 | |||||||||
| Japan | 5,936 | 5,864 | 6,373 | |||||||||
| EMEA | 4,740 | 5,743 | 6,650 | |||||||||
| Hong Kong/Taiwan | 3,015 | 3,666 | 4,165 | |||||||||
| Total | 48,737 | 61,383 | 72,525 | |||||||||
| (1) | The December 31, 2022 number reflects a modified Sales Leader definition. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—“Mainland China” for more information. |
5
Global Direct Selling Channel
Outside of Mainland China, individuals can elect to participate in our business as follows:
| ● | “ |
| ● | “Company-Direct Consumers”—Individuals who purchase products directly from the company. These consumers are typically referred by a |
| ● | “Basic |
| ● | “Sales Leaders and Qualifiers”— |
To become a distributor,Brand Affiliate, an individual signs a distributorBrand Affiliate agreement and receives a business portfolio, which is free in most markets and in some cases is delivered in electronic form.markets. In some markets, we charge a small fee for the business portfolio, which is limited to our costs. The business portfolio generally consists of documentation concerning the business, including copies of the sales compensation plan, distributorBrand Affiliate policies and procedures, product catalog and other documentation, but does not include products. There are no requirements to purchase products or other materials to become a distributor,Brand Affiliate, and no commissions are paid on any purchase of a business portfolio.
We offer a generous product return policy, which also includes returns of business support materials. In most markets, we offer a return policy that allows our distributorsBrand Affiliates to return unopened and unused items for up to 30 days for a full refund, or 12 months subject to a 10% restocking fee. DistributorsBrand Affiliates are not required to terminate their distributorshipaccounts to return product. Actual returns have historically been less than 5% of annual revenue. We believe our generous return policy minimizes the financial risks associated with being a distributor.Brand Affiliate.
In addition to our product return policy, we strive to be as customer protective as possible. We seek to ensure that those who use our products or participate in our business opportunity are treated fairly and are not misled by inappropriate product or earnings claims.
There are two fundamental ways in which our distributorsBrand Affiliates can earn money:
| ● |
| ● | through sales compensation earned on the sale of products under our global sales compensation plan. |
We believe that our global sales compensation plan which has been implemented in each of our markets except Mainland China, is among the most generous in the direct selling industry and is one of our competitive advantages. Our Brand Affiliates can receive sales compensation for product sales from the company to their own consumer groups. Likewise, our Sales Leaders can receive sales compensation under our global sales compensation plan for product sales from the company to their own network of consumers as well as for product sales from the company to other Sales Leaders and their consumer groups. This type of sales compensation is often referred to as “multi-level” compensation. Our sales force is not required to recruit or sponsor others, and we do not pay any sales compensation for recruiting or sponsoring. While all of our distributorsBrand Affiliates can sponsor others at any time, our Sales Leaders and those in qualification to become Sales Leaders are those who generally are activelythe most active in sponsoring others. Pursuant to our global sales compensation plan, we pay consolidated sales compensation in a Sales Leader’s home market, in local currency, for product sales in the Sales Leader’s own consumer group and for product sales in the Sales Leader’s team of Sales Leaders across all geographic markets.
Mainland China Business Model
Because of restrictions on direct selling and multi-level commissions in Mainland China, we have implemented a business model for that market that is different from the business model we use in our other markets. We have structured our business model in Mainland China based on several factors: the guidance we have received from government officials, our interpretation of applicable regulations, our understanding of the practices of other international direct selling companies operating in Mainland China, and our understanding as to how regulators are interpreting and enforcing the regulations.
In Mainland China, we utilize sales employees to sell products through our retail stores, website and website;digital platforms; independent direct sellers, who can sell away from our stores where we have a direct selling license and a service center and can also sell through our website;website and digital platforms; and independent marketers, who are licensed business owners authorized to sell our products at their own approved premises or through our stores, website and website.digital platforms. We rely on our sales employees, independent direct sellers and independent marketers to attract new consumers, and promote repeat purchases, and to educate our sales force about our products, culture and policies through frequent training meetings.
Our sales employees, independent direct sellers and independent marketers in Mainland China do not participate in our global sales compensation plan but are instead compensated according to a separate compensation model established for Mainland China.China, which is separate and different from our global compensation plan. Independent direct sellers and sales employees who have not achieved certain qualification requirements receive monthly bonuses based on their monthly product sales. Sales employees independent direct sellerswho achieve qualification requirements and independent marketers earn (1) retailmonthly bonuses based on their monthly product sales;sales and other bonuses based on various performance metrics; and (2) a salary (sales employee)(for sales employees, consisting of position pay and performance pay) or service fee (independent marketer), which is(for independent marketers). The salary or service fee and position/title are reviewed and adjusted quarterly based on their position and performance relative to other sales leaders, taking into account such factors as the sales productivity of the Sales Leader him/herself and of the sales representativesforce that such Sales Leader trains, collaborates with, supports and services. We utilize our global system to track and assess the sales productivity of each Sales Leaders can also earn other bonusesLeader him/herself and the sales force that such Sales Leader trains, collaborates with, supports and services in setting his/her salary or special incentives based on various performance metrics.service fee and in connection with the evaluation of their position/title. We generally compensate our Mainland China Sales Leaders at a level that is competitive with other direct selling companies in the market and reflective ofcomparable to the compensation of our Sales Leaders globally.
Operating in Mainland China entails certain risks and uncertainties to our business, as discussed further in Item 1. Business—“Regulation” and Item 1A. Risk Factors. We endeavor to mitigate these risks and uncertainties through various measures, including by seeking to understand and obey laws and regulations, training our employees and sales force, engaging in dialogue with government officials to better understand their goals and explain our plans, and cooperating in inquiries and other matters of interest to regulators. However, these efforts do not eliminate the significant risks associated with operating in Mainland China.Furthermore, we believe the regulatory environment in Mainland China is becoming increasingly challenging and will continue to be so over the medium and long terms. We currently plan to implement certain changes to the structure of our sales compensation in Mainland China due to the evolving commercial and regulatory environment. These changes could have a negative impact on our sales in that market.
Our global sales compensation plan and our Mainland China business model, including our related know-how, processes and systems, play a significant role in helping us to attract and incentivize our sales force. We have strategically developed and refined our global sales compensation plan and our Mainland China business model to distinguish the business opportunity that we offer from those of other companies and to seek to provide us with a competitive advantage.
Sales Incentives, Meetings, Recognition and Training
An important part of our distribution channel is motivating our Sales Leaders and recognizing their achievements. We hold regular meetings and events globally in order to recognize Sales Leaders who have achieved various levels of success in our business. These meetings, which may be held either virtually or in-person, also allow the company and key Sales Leaders to provide training to other Sales Leaders. We utilize a variety of sales incentives such as incentive trips to motivate Sales Leaders. In addition to rewarding performance, incentive trips provide Sales Leaders and the company opportunities to share best practices, and set goals, generate alignment of Sales Leaders around key initiatives, and provide a high level of motivation and team building.
Product Launch Process
Sales Leader previews limited-time offers and other product introductions and promotions maysometimes generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue during the quarter and can skew year-over-year and sequential comparisons. We believe our product launch process attracts new Customers, Paid Affiliates and Sales Leaders to our business, increases consumer trial and provides us with important marketing and forecasting information about our products. Please refer to Item 1A. Risk Factors for more information on risks related to our product launch process.
We currently sell and distribute our Nu Skin business’s products in approximately 50 markets. We have divided our markets into seven segments: Mainland China; South Korea; Southeast Asia,Asia/Pacific, which includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Australia, New Zealand and Vietnam; Americas/Pacific,other markets; Americas, which includes Australia, Canada, Latin America New Zealand and the United States; Japan; Hong Kong/Taiwan, which also includes Macau; and Europe, Middle East and Africa (“EMEA”), which includes several markets in Europe as well as Israel Russia and South Africa. We also generate revenue in our Manufacturing and Grow Tech segments, which consist of the manufacturing and controlled-environment agriculture businesses within ourOur Rhyz strategic investment arm.arm also includes two additional segments: Manufacturing and Rhyz other. The following table sets forth the revenue for each of the segments and the Other category for the years ended December 31, 2019, 2018 and 2017.last three years.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| (U.S. dollars in millions) | 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||
| Nu Skin | ||||||||||||||||||||||||||||||||||||||||||||||||
| Americas | $ | 508.5 | 23 | % | $ | 547.8 | 20 | % | $ | 453.0 | 18 | % | ||||||||||||||||||||||||||||||||||||
| Mainland China | $ | 722.5 | 30 | % | $ | 886.5 | 33 | % | $ | 717.0 | 32 | % | 360.4 | 16 | 568.8 | 21 | 625.5 | 24 | ||||||||||||||||||||||||||||||
| Americas/Pacific | 349.1 | 14 | 385.0 | 14 | 342.4 | 15 | ||||||||||||||||||||||||||||||||||||||||||
| Southeast Asia/Pacific | 344.4 | 16 | 336.7 | 13 | 361.6 | 14 | ||||||||||||||||||||||||||||||||||||||||||
| South Korea | 330.0 | 14 | 373.4 | 14 | 361.7 | 16 | 268.7 | 12 | 354.3 | 13 | 326.5 | 13 | ||||||||||||||||||||||||||||||||||||
| Southeast Asia | 301.6 | 12 | 316.9 | 12 | 268.6 | 12 | ||||||||||||||||||||||||||||||||||||||||||
| Japan | 260.0 | 11 | 254.9 | 10 | 256.1 | 11 | 224.9 | 10 | 266.2 | 10 | 273.7 | 10 | ||||||||||||||||||||||||||||||||||||
| EMEA | 167.2 | 7 | 182.4 | 7 | 160.3 | 7 | 204.3 | 9 | 283.2 | 11 | 230.2 | 9 | ||||||||||||||||||||||||||||||||||||
| Hong Kong/Taiwan | 166.3 | 7 | 185.9 | 7 | 166.7 | 7 | 157.2 | 7 | 162.6 | 6 | 161.1 | 6 | ||||||||||||||||||||||||||||||||||||
| Other | 1.7 | — | 3.4 | — | 6.3 | — | 4.0 | — | 3.5 | — | 1.0 | — | ||||||||||||||||||||||||||||||||||||
| Total Nu Skin | 2,298.4 | 95 | 2,588.4 | 97 | 2,279.1 | 100 | 2,072.4 | 93 | 2,523.1 | 94 | 2,432.6 | 94 | ||||||||||||||||||||||||||||||||||||
| Manufacturing | 121.9 | 5 | 90.6 | 3 | — | — | 149.5 | 7 | 172.1 | 6 | 149.3 | 6 | ||||||||||||||||||||||||||||||||||||
| Grow Tech | 0.1 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Rhyz other | 3.8 | — | 0.5 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total Rhyz Investments | 153.3 | 7 | 172.6 | 6 | 149.3 | 6 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 2,420.4 | 100 | % | $ | 2,679.0 | 100 | % | $ | 2,279.1 | 100 | % | $ | 2,225.7 | 100 | % | $ | 2,695.7 | 100 | % | $ | 2,581.9 | 100 | % | ||||||||||||||||||||||||
Additional comparative revenue and related financial information is presented in Note 1815 to the consolidated financial statements contained in this report.
Our business is subject to various laws and regulations globally, particularly with respect to our direct selling business models and our product categories. In addition, as a United States entity operating through subsidiaries in foreign jurisdictions, we are subject to foreign exchange control, transfer pricing and customs laws that regulate the flow of funds between us and our subsidiaries and for product purchases, management services and contractual obligations, such as the payment of sales commissions.
As is the case with most companies in our industry, we receive inquiries from time to time from government regulatory authorities regarding the nature of our business and other issues, such as compliance with local direct selling, transfer pricing, customs, taxation, foreign exchange control, securities and other laws. Negative publicity related to government inquiries into our operations in the United States in the early 1990s, in South Korea in the late 1990s and in Mainland China in 2014 has negatively impacted our business.
Direct Selling Regulations
Direct selling is regulated by various national, state and local government agencies in the United States and foreign markets. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, including “pyramid” schemes, which compensate participants primarily for recruiting additional participants without significant emphasis on product sales to consumers. The laws and regulations in our current markets generally:
| ● | impose requirements related to order cancellations, product returns, inventory buy-backs and cooling-off periods for our sales force and consumers; |
| ● | require us, or our sales force, to register with government agencies; |
| ● | impose limits on the amount of sales compensation we can pay; |
| ● | impose reporting requirements; and |
| ● | require that our sales force is compensated for sales of products and not for recruiting others. |
The laws and regulations governing direct selling may be modified or reinterpreted from time to time, which may cause us to modify our sales compensation and business models. In almost all of our markets, regulations are subject to discretionary interpretation by regulators and judicial authorities. There is often ambiguity and uncertainty with respect to the state of direct selling and anti-pyramiding laws and regulations. In the United States, for example, federal law provides law enforcement agencies, such as the Federal Trade Commission (“FTC”), broad latitude in policing unfair or deceptive trade practices, but does not provide a bright-line test for identifying a pyramid scheme. SeveralA number of states have passed legislation that more clearly distinguishes between illegal pyramid schemes and legitimate multi-level marketing business models. Recent settlements between the FTC and other direct selling companies and guidance from the FTC have addressed inappropriate earnings and lifestyle claims, problematic compensation structures and the importance of focusing on consumers. In addition, during 2021 the FTC announced that it is initiating a review of its Business Opportunity Rule, which imposes certain obligations on business opportunity sellers in their dealings with prospective buyers; the FTC issued a request for public comment on this rule in November 2022. Currently, multi-level marketing companies are exempted from this rule. If this exemption is eliminated or if new regulations are adopted for multi-level marketing companies, it could negatively impact the growth of our sales force and our revenue. Also during 2021, the FTC sent a notice to more than 1,100 companies, including us and two of our subsidiaries (Pharmanex, LLC and Big Planet, Inc.), that outlined several practices that the FTC determined to be unfair or deceptive in prior administrative cases. These practices relate to earnings claims, other money-making opportunity claims, and endorsements and testimonials. Pursuant to the FTC’s “penalty offense authority,” companies that received the notice are expected to comply with the standards set in the prior administrative cases and could incur significant civil penalties if they or their representatives fail to do so. The penalties could be up to $46,517 per violation, and there is some ambiguity in how a “violation” would be defined for these purposes. In addition, during 2022, the FTC issued an Advanced Notice of Proposed Rulemaking (“ANPR”) indicating that it is considering proposing a rule regarding earnings claims. The ANPR also suggested, among other things, that the FTC might not consider a disclaimer (such as “results not typical”) to be sufficient to correct a misleading impression from an atypical earnings claim. For more information about these matters, other regulatory actions, and their potential impact on our business, see Item 1A. Risk Factors—“Challenges to the form of our network marketing system or to our business practices could harm our business” and “Laws and regulations may prohibit or severely restrict direct selling and cause our revenue and profitability to decline, and regulators could adopt new regulations that harm our business.”
The regulatory environment in Mainland China is particularly complex and continues to evolve. Mainland China’s direct selling and anti-pyramiding regulations contain various restrictions, including a prohibition on the payment of multi-level compensation. The regulations are subject to discretionary interpretation by state, provincial and local regulators as well as local customs and practices. Regulators continue to act cautiously as they monitor the development of direct selling in Mainland China. As of January 31, 2020, we have obtained direct selling licenses in 37 cities in 25 provinces and municipalities in Mainland China. To expand our direct selling model into additional provinces in Mainland China, we currently must obtain a series of approvals from the local Department of Commerce in such provinces, the Shanghai Municipal Commission of Commerce (our supervisory authority), as well as the Ministry of Commerce, PRC (“MOFCOM”), which is the national governmental authority overseeing direct selling. In the course of obtaining these approvals, the respective authorities under MOFCOM must also consult and seek opinions on our business operations from the Ministry of Public Security and the Administration for Market Regulation at both provincial and state levels.Government authorities have not been issuing new licenses for direct selling since the beginning of the 100-day action in early 2019.
Our operations in Mainland China are subject to significant government and media scrutiny and investigations. At times, investigations and other regulatory actions have limited our ability to conduct business in Mainland China. For example, initially as a resultthe government’s scrutiny of activities within the health products and direct selling industries has been at higher levels since 2019, following negative media coverage about the healthcare-related product claims made by another direct selling company in Mainland China, the government’s scrutiny of activities within the health products and direct selling industries was during 2019, and continues to be, at higher levels.China. During this time, we have been receiving and addressing an increased number of government reviews, inspections, and inquiries and consumer complaints in Mainland China; our ability to hold certain business meetings has been limited; and negative media coverage has spread to include additional companies, including ours. Another example occurred in 2014. In response to media and government scrutiny of our Mainland China business in 2014, we voluntarily took a number of actions in Mainland China, including temporarily suspending our business meetings, temporarily suspending acceptance of applications for any new sales representatives, and extending our product refund and return policies. These voluntary measures and the adverse publicity had a significant negative impact on our business. We face a risk that future investigations and other regulatory actions may result in fines, revocation of licenses or other significant sanctions.
Several markets, including Mainland China, South Korea, Indonesia and Vietnam, impose limits on the amount of commissionssales compensation we can pay to our sales force. For example, under regulations in Mainland China, direct selling companies may pay independent direct sellers in Mainland China up to a maximum 30% of the revenue they generate through their own sales of products to consumers. Additionally, in South Korea, local regulations limit sales compensation to 35% of ourthe total valueprice of goods or services supplied in South Korea. We have implemented various measures to comply with these limits, including adjusting the commissionable value of some of our products in this market.limits.
In some markets, regulations applicable to the activities of our Sales Leaders may affect our business because we are, or regulators may assert that we are, responsible for our Sales Leaders’ conduct. In these markets, regulators may request or require that we take steps to ensure that our Sales Leaders comply with local regulations. For example, in Japan, we have taken steps to comply with strict requirements regarding how distributorsBrand Affiliates approach prospective customers. From time to time, we receive warningsinformation from consumer centers in certain prefectures about the number of general inquiries and complaints about us and our distributors. As a result,Brand Affiliates, and we also sometimes receive warnings to reduce such complaints. Based on this information, we continually evaluate and enhance our distributorBrand Affiliate compliance, education and training efforts in Japan.
Our sales force is required to comply with work authorization and other local legal requirements prior to working in a market. Some markets, including Mainland China and Vietnam, also prohibit or restrict participation of overseas personnel or foreigners in direct selling activities. We have implemented policies that are designed to comply with these regulations and inform our sales force regarding the types of activities that are not permitted. However, we cannot assure that actions of our sales force will not violate local laws or regulations or our policies.
Please refer to Item 1A. Risk Factors for more information on regulatory and other risks associated with our business.
Product Regulations
Our personal carebeauty and wellness products and related promotional and marketing activities are subject to extensive government regulation by numerous federal, state and local government agencies and authorities, including the United States Food and Drug Administration (the “FDA”), the FTC,Federal Trade Commission (the “FTC”), the Consumer Product Safety Commission, the Department of Agriculture, United States and State Attorneys General and other state regulatory agencies in the United States, as well as the State Administration for Market Regulation in Mainland China, the Food and Drug Administration in Taiwan, the Ministry of Food and Drug Safety in South Korea, the Ministry of Health, Labour and Welfare in Japan and similar government agencies in all other markets in which we operate. In the United States, the FDA, in particular, regulates the formulation, manufacture and labeling of over-the-counter (“OTC”) drugs, cosmetics, dietary supplements, foods and medical devices such as those distributed by us.that we distribute.
Regulation of Personal CareBeauty Products in the United States. Our personal carebeauty products are subject to various laws and regulations that regulate cosmetic and personal care products and set forth regulations that, among other things, determine whether a product can be marketed as a “cosmetic” or requires further approval as an OTC drug. In the United States, the regulation of cosmetic content and labeling is under the primary jurisdiction of the FDA. Cosmetics are not subject to pre-market approval by the FDA, but their ingredients and their label and labeling content are regulated by the FDA, and it is the burden of those who sell cosmetics have the burden to ensure that they are safe for use as directed and not adulterated or misbranded. The labeling of cosmetic products is subject to the requirements of the Federal Food, Drug, and Cosmetic Act (“FDCA”), the Fair Packaging and Labeling Act and other FDA regulations.
The FDCA defines cosmetics by their intended use, as “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body . . . for cleansing, beautifying, promoting attractiveness, or altering the appearance.”appearance . . . .” Among the products included in this definition are skin moisturizers, perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, shampoos, permanent waves, hair colors, toothpastes and deodorants, as well as material intended for use as a component of a cosmetic product. A product may be considered a drug if it is intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease, or is intended to affect the structure or any function of the body (“structure/function claims”). A product’s intended use can be inferred from marketing or product claims, and regulators may consider the marketing claims of our sales force. Structure/function claims are generally prohibited for cosmetic products as are disease prevention and treatment claims. The FDA prohibits certain ingredients from being included in cosmetic products. It is possible that cosmetic product ingredients now commonly in use that are the product of certain scientific advancements or production processes may be restricted or prohibited in the future as more is learned about such ingredients.
In recent years, the FDA has issued warning letters to many cosmetic companies alleging improper structure/function claims regarding their cosmetic products, including, for example, product claims regarding gene activity, cellular rejuvenation, and rebuilding collagen. Cosmetic companies confront difficulty in determining whether a claim would be considered by the FDA to be an improper structure/function claim. Given this difficulty, and our research and product development focus on the sources of aging and the influence of certain ingredients on gene expression, there is a risk that we could receive a warning letter, be required to modify our product claims, or take other actions to satisfy the FDA if the FDA determines any of our marketing materials contain improper structure/function claims for our cosmetic products. In addition, plaintiffs’ lawyers have filed class action lawsuits against some of our competitors after our competitors received these FDA warning letters. There can be no assurance that we will not be subject to government actions or lawsuits, which could harm our business.
Certain products, such as sunscreens and acne treatments, are classified as OTCover-the-counter (“OTC”) drugs (and cosmetics, depending on claims) and have specific ingredient, labeling and manufacturing requirements. OTC drug products may be marketed if they conform to the requirements of an FDA-established OTC drug monograph that is applicable to that drug. Drug products not conforming to monograph requirements require an approved New Drug Application (“NDA”) before marketing may begin. Under these provisions, if the agency were to find that a product or ingredient of one of our OTC drug products is not generally recognized as safe and effective or is not included in a final monograph that is applicable to one of our OTC drug products, we may be required to reformulate or cease marketing that product until it is the subject of an approved NDA or until the time, if ever, that the monograph is amended to include such product. The labeling of these products is subject to the requirements of the FDCA and the Fair Packaging and Labeling Act and other FDA regulations.
Regulation of Personal CareBeauty Products in Other Markets. The other markets in which we operate have similar regulations. In Mainland China, personal carebeauty products, other than devices, are placed into one of two categories, “special-purpose cosmetics” and “non-special-purpose“general cosmetics.” Products in both categories require submissionadequate substantiation of formulasefficacy, which must be made available to authorities prior to marketing a product and other information with the health authorities,which can be reviewed and certain products require human clinical studies.enforced upon at any time thereafter. The product registration process for some categories of personal carebeauty products in Mainland China can be unpredictable and generally takes from 9three to 18six months to complete. However,complete under the latest regulations governing cosmetics. Certain cosmetics are categorized as “special cosmetics” and carry a more unpredictable process and timing frequently in some cases, product registration in Mainland China has taken severalexcess of two years. In Japan, the Ministry of Health, Labour and Welfare regulates the sale and distribution of cosmetics and requires us to have an import business license and to register each personal carebeauty product imported into Japan. In Taiwan, all “medicated” cosmetic products require registration. In South Korea, all “functional” cosmetics are required to either undergo examination by or be reported to the Ministry of Food and Drug Safety. The sale of cosmetic products is regulated in the European Union (the “EU”) under the EU Cosmetics Directive, which requires a uniform application for foreign companies making personal carebeauty product sales. Similar regulations in any of our markets may limit our ability to import products or utilize key ingredients or technologies globally and may delay product launches while the registration and approval process is pending. Changing regulations may require us to stop selling, discontinue, or reformulate and re-register products in order to sell those products.
Regulation of Wellness Products in the United States. Our wellness products are also subject to applicable regulations of government agencies in the markets in which we operate. In the United States, we generally market our wellness products as conventional foods or dietary supplements. The FDA has jurisdiction over this regulatory area. The FDA imposes specific requirements for the labels and labeling of food and dietary supplements, including the requirements of the Food Allergen Labeling and Consumer Protection Act of 2004, which mandates declaration of the presence of major food allergens. In addition, the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 contains requirements with regard to the sale and importation of food products in the United States.
The FDA Food Safety Modernization Act (“FSMA”), which was signed into law in 2011, also increased the FDA’s authority with respect to food safety and made significant changes to the FDCA with respect to strengthening the U.S. food safety system. It enables the FDA to focus more on preventing food safety problems rather than primarily reacting to problems after they occur. The law also provides the FDA with enforcement authorities designed to achieve higher rates of compliance with prevention- and risk-based food safety standards and to better respond to and contain problems when they do occur. The law also gives the FDA important tools to hold imported foods to the same standards as domestic foods and directs the FDA to build an integrated national food safety system in partnership with state and local authorities. The FDA is actively enforcing FSMA requirements, subjecting food and nutritional supplements to increased regulatory scrutiny. Pursuant to FSMA, the FDA is authorized, among other things, to order mandatory recalls, issue “administrative detention” orders, and revoke manufacturing facility registrations (effectively preventing the operation of a food or dietary supplement manufacturing facility), and importers of foods and nutritional supplements are subject to Foreign Supplier Verification Program requirements.
The FDA regulates dietary supplements principally under the Dietary Supplement Health and Education Act of 1994 (“DSHEA”). DSHEA formally defines what may be sold as a dietary supplement, defines statements of nutritional support and the conditions under which they may lawfully be used, and includes provisions that permit the FDA to regulate manufacturing practices and labeling claims applicable to dietary supplements. Because the majority of our wellness products are regulated under DSHEA, we are generally not required to obtain regulatory approval prior to introducing a dietary supplement into the United States market. Prior to marketing a product, we are obligated to notify the FDA of any structure/function claims that we intend to make about the product in any product-related materials.
Generally, under DSHEA, dietary ingredients that were on the market before October 15, 1994 may be used in dietary supplements without notifying the FDA. However, a “new” dietary ingredient (i.e., a dietary ingredient that was not marketed in the United States before October 15, 1994) must be the subject of a new dietary ingredient notification submitted to the FDA unless the ingredient has been “present in the food supply as an article used for food” without having been “chemically altered.” The enforcement of the term “chemically altered” has been and continues to evolve within the FDA. As such, an ingredient that is deemed today not to be “chemically altered” may be viewed otherwise in the future, which could lead to our being required to reformulate or cease marketing the product until such time that we can find a suitable replacement. A new dietary ingredient notification must provide the FDA with evidence of a “history of use or other evidence of safety” which establishes that use of the dietary ingredient “will reasonably be expected to be safe.” A new dietary ingredient notification must be submitted to the FDA at least 75 days before the new dietary ingredient can be marketed. Under DSHEA, the FDA may seek to remove from the market any new dietary ingredient that the FDA determines to be unsafe. In addition, the FDA may also deem a dietary supplement an unapproved drug where the marketing claims made in connection with the sale or promotion of the product effectively place it in the drug category.
From time to time, efforts are made by some individuals or groups to repeal DSHEA. If this were to happen, significant burdens would be imposed on our product development, and the costs of running our business would increase significantly.
Regulation of NutritionalWellness Products Globally. In our foreign markets, nutritional supplements are generally regulated by similar government agencies, such as the Mainland China State Administration for Market Regulation, the South Korea Ministry of Food and Drug Safety; the Japan Ministry of Health, Labour and Welfare and the Taiwan Department of Health. We typically market our wellness products in international markets as foods, health foods, dietary supplements, food supplements or other similar categorizations under applicable regulatory regimes. With few exceptions, in the event a product or ingredient is classified as a drug or pharmaceutical product in any market, we will generally not be able to distribute that product in that market through our distribution channel because of pre-market approvals and strict regulations applicable to drug and pharmaceutical products. Mainland China also has highly restrictive nutritional supplement product regulations. ProductsA vast majority of products marketed as “health foods” are subject to extensive laboratory and clinical analysis by government authorities, and the product registration process in Mainland China takes a minimum of two years and may be substantially longer. In some cases it has taken us four years or longer to obtain product registrations. A pre-market process has been established for a minority of “health foods,” which allows products with only basic nutritional ingredients (some vitamins and minerals) to be notified rather than registered. We market both “health foods” and “general foods” in Mainland China. There is some risk associated with the common practice in Mainland China of marketing a product as a “general food” while seeking “health food” classification. If government officials feel the categorization of our products is inconsistent with product claims, form of delivery, ingredients or function, this could end or limit our ability to market such products in Mainland China in their current form. In addition, we are not permitted to market or sell “general foods” through our direct sales channel in Mainland China and any efforts by our independent direct sellers to do so could result in negative publicity, fines and other government sanctions being imposed against us.
The markets in which we operate all have varied regulations that distinguish foods and nutritional supplements from “pharmaceutical products.” Because of the varied regulations, some products or ingredients that are recognized as a “food” in certain markets may be treated as a “pharmaceutical” in other markets. In Japan, for example, if a specified ingredient is not listed as a “food” by the Ministry of Health and Welfare, we must either modify the product to eliminate or substitute that ingredient, or petition the government to treat such ingredient as a food. We experience similar issues in our other markets. This is particularly a challenge in Europe, where regulations often still differ from member state to member state, despite EU regulations designed to harmonize the laws of EU member states. With markets in the Association of Southeast Asian Nations (“ASEAN”), certain member states have amended some of their requirements in anticipation of the harmonization of ASEAN supplement regulations, even though these changes may not be identical to the eventual ASEAN requirements nor consistent with other member states. As a result, we often must modify the ingredients and/or the levels of ingredients in our products for certain markets or create unique formulations for multiple markets. In some circumstances, the regulations in foreign markets may require us to obtain regulatory approval prior to introduction of a new product or limit our use of certain ingredients altogether.
Because of negative publicity associated with some adulterated or misbranded supplements, including pharmaceutical drugs marketed as dietary supplements, there has been an increased movement in the United States and other markets to expand the regulation of dietary supplements, which could lead to additional restrictions or requirements in the future. In general, the regulatory environment is becoming more complex with increasingly stricter regulations each year.
Manufacturing Process. In 2008, and as subsequently updated under the regulations implementing the FSMA, the FDA established regulations to require current “good manufacturing practices” for dietary supplements and food products in the United States. The regulations ensure that dietary supplements and food products are produced in a quality manner, do not contain contaminants or impurities above pre-established levels, and are accurately labeled. The regulations include requirements for establishing quality control procedures for us and our vendors and suppliers, designing and constructing manufacturing plants, and testing ingredients and finished products throughout our supply chain. The regulations also include requirements for record keeping and handling consumer product complaints. If dietary supplements or food products contain contaminants or allergens or do not contain the type or quantity of dietary ingredient they are represented to contain, the FDA would consider those products to be adulterated or misbranded. Our business is subject to additional FDA regulations, such as new dietary ingredient regulations and adverse event reporting regulations that require us to document and track adverse events and report serious adverse events that involve hospitalization, permanent impairment or death associated with consumers’ use of certain of our products. Compliance with these regulations has increased, and may further increase, the cost of manufacturing and selling certain of our products as we incur internal costs, oversee and inspect more aspects of third-party manufacturing and work with our vendors to assure they are in compliance and maintain accurate recordkeeping to establish controls. Failure to comply with good manufacturing practices could also result in product recalls.
Advertising and Product Claims. Most of our major markets also regulate advertising and product claims regarding the efficacy and quality of products and require adequate and reliable scientific substantiation of all claims. In most of our foreign markets, we are typically not able to make any “medicinal” claims with respect to our wellness products. In some cases, such regulations may limit our ability to inform consumers of some of the benefits our products offer.
In the United States, the FDA generally prohibits disease diagnosis, prevention and treatment claims when made for a dietary supplement. DSHEA, however, permits substantiated, truthful and non-misleading “statements of nutritional support” to be included in labeling for dietary supplements without FDA pre-approval. Such statements may describe how a particular dietary ingredient affects the structure, function or general well-being of the body, or the mechanism of action by which a dietary ingredient may affect the structure, function or well-being of the body, but such statements may not state that a dietary supplement will reduce the risk or incidence of a disease unless such claim has been reviewed and approved by the FDA. In addition, the FDA permits companies to use FDA-approved full and qualified health claims for products containing specific ingredients that meet stated requirements.
A company that uses a statement of nutritional support in labeling must possess evidence substantiating that the statement is truthful and not misleading. The FDA has issued guidance defining a manufacturer’s obligations to substantiate structure/function claims. Such statements, when used in labeling, must also be submitted to the FDA no later than thirty30 days after first marketing the product with the statement that they possess the necessary evidence and must be accompanied by an FDA mandated label disclaimer that “This statement has not been evaluated by the FDA. This product is not intended to diagnose, treat, cure or prevent any disease.” There can be no assurance, however, that the FDA or FTC will not determine that a particular statement of nutritional support that we want to use is an unacceptable disease claim or an unauthorized nutrient-disease relationship claim otherwise permitted with FDA approval as a “health claim” or that such claims have competent and reliable scientific evidence. Such a determination might prevent the use of such a claim or result in additional FDA enforcement.
We are aware of media reports regarding dietary supplements, which call for the repeal or amendment of DSHEA. Individuals or groups that are opposed to supplements or question their safety or efficacy may attempt, from time to time, to use these media reports to propose legislation intended to amend or repeal DSHEA. Some of the legislative proposals may include variations on premarket approval, enhanced premarket safety or substantiation required and changing the definition of a “dietary ingredient” to remove either botanicals or selected classes of ingredients now treated as dietary ingredients.
Most of the other markets in which we operate have not adopted legislation like DSHEA, and we may be subject to more restrictive limitations on the claims we can make about our products in these markets. For example, in Japan, our nutritional supplements are marketed as food products, which significantly limits our ability to make claims regarding these products. If marketing materials produced or used by us or our sales force globally make claims that exceed the scope of allowed claims for nutritional supplements, the FDA or other regulatory authorities could deem our products to be unapproved drugs. In Mainland China, we also face significant restrictions on our ability to make product claims regarding the efficacy of our products. Violations, alleged violations, or negative media attention related to our compliance with these restrictions could harm consumers’ perception of our business and products and could negatively impact the registration, licensing status and sales of our products.
The FTC, which exercises primary jurisdiction over the advertising of all of our products in the United States, has instituted enforcement actions against dietary supplement, food, and cosmetic companies for, among other things, deceptive advertising and lack of adequate scientific substantiation for claims. We also face limitations on our use of the scientific experts who have helped us develop and test some of our products. In the United States, for example, the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising may restrict marketing to those results obtained by a “typical” consumer and require disclosure of any material connections between an endorser and the company or products they are endorsing. In Mainland China, some media outlets have questioned the nature and extent of our connections with our Scientific Advisory Board and others who have helped in developing our scientific approach or testing our products. This negative publicity could harm consumers’ perception of our business and our products, which could negatively impact our revenue. We cannot be sure that the FTC, or comparable foreign agencies, will not question our advertising or other operations in the future.
In recent years, the FTC has initiated numerous investigations of and actions against companies that sell dietary supplements and cosmetic products. The FTC has issued guidance to assist companies in understanding and complying with its substantiation requirement. The FTC may enforce compliance with the law in a variety of ways, both administratively and judicially, using compulsory process, cease and desist orders, and injunctions. FTC enforcement can result in consent decrees or orders requiring, among other things, injunctive provisions, corrective advertising, consumer redress, and such other relief as the agency deems necessary to protect the public. Violation of these consent decrees or orders could result in substantial financial or other penalties. The FTC also sends warning letters as it monitors companies’ activities. For example, during 2020 to 2022, the FTC issued letters that warned several direct-selling companies to remove and address claims that they or members of their sales force were making about their products’ ability to treat or prevent COVID-19 and/or about the earnings that people who have recently lost income could make. No assurance can be given that the FTC will not question our advertising or other operations in the United States in the future. Any action in the future by the FTC could materially and adversely affect our ability to successfully market our products in the United States.
In connection with investigations that occurred in the early 1990s of certain alleged unsubstantiated product and earnings claims made by our distributors,Brand Affiliates, we entered into atwo consent decreedecrees with the FTC and various agreements with state regulatory agencies. The consent decree requiresdecrees require us to, among other things, supplement our procedures to enforce our policies, not allow our distributorsBrand Affiliates to make earnings representations without making certain average earnings disclosures and not allow our distributorsBrand Affiliates to make unsubstantiated product claims. The FTC could initiate an enforcement action to the extent the FTC determines that our advertising or promotional practices are deceptive or contrary to the requirements of the consent decree.decrees.
Regulation of Medical Devices. In 2014, our facial spaNu Skin Facial Spa was cleared for marketing through the 510(k) process with the FDA as a medical device with cosmetic benefit. Medical devices are highly regulated by the FDA. Manufacturers of medical devices must register and list their products with the FDA annually, whether they are located domestically or overseas. Foreign jurisdictions may take note of the fact that we have registered a medical device in the United States and require us to register in their market as well. The FDA has broad regulatory powers in the areas of clinical testing, manufacturing and labeling of medical devices. Medical devices must be labeled in accordance with the FDA’s general device labeling requirements and whatever particular label requirements the FDA may designate for that type of device.
In addition, medical device manufacturers must adhere to certain “good manufacturing practices” in accordance with the FDA’s Quality System Regulation, which regulates the manufacture of medical devices, prescribes record-keeping procedures and provides for the routine inspection of facilities for compliance with such regulations. If in connection with these inspections, the FDA believes the manufacturer has failed to comply with applicable regulations and/or procedures, it may issue observations that would necessitate prompt corrective action. If the FDA inspection observations are not addressed and/or corrective action taken in a timely manner and to the FDA’s satisfaction, the FDA may issue a Warning Letterwarning letter (which would similarly necessitate prompt corrective action) and/or proceed directly to other forms of enforcement action. Failure to respond timely to FDA inspection observations, a Warning Letterwarning letter or other notice of noncompliance and to promptly come into compliance could result in the FDA bringing enforcement action against us, which could include the shutdown of our production facilities, denial of importation rights to the United States for products manufactured in overseas locations and criminal and civil fines.
Our Pharmanex BioPhotonic Scanner, ageLOC LumiSpa, ageLOC Spa systems and anyour current and future devicesdevice products may be subject to the regulations of various health, consumer-protection and other government authorities around the world. These regulations vary from market to market and affect whether our products are required to be registered as medical devices, the claims that can be made with respect to these products, who can use them, and where they can be used. Our connected devices are subject to specific testing, certification, and/or registration governing the connectivity to mobile devices. We have been required to register our ageLOC Galvanic Facial Spa and ageLOC Body Spa systems as medical devices in a few markets. Under applicable direct selling regulationsmarkets, and we also have received clearance from the FDA to market our Nu Skin Facial Spa for over-the-counter use. We have registered ageLOC Boost as a medical device in Mainland China, our Pharmanex BioPhotonic Scanner, ageLOC LumiSpaThailand, and ageLOC Spa systemswe are registered as “health care equipment” or “household appliances.”seeking medical device registration in the United States and Thailand for the new connected body device that we plan to begin launching during 2023. We have been subject to regulatory inquiries in the United States, Japan and other markets with respect to the status of the Pharmanex BioPhotonic Scanner as a non-medical device. Any determination that medical device clearance is required for one of our products, in a market where we currently market and sell such product as a cosmetic or non-medical device, could require us to expend significant time and resources in order to meet the additional stringent standards imposed on medical device companies or prevent us from marketing the product.
Under applicable direct selling regulations in Mainland China, our Pharmanex BioPhotonic Scanner, ageLOC LumiSpa, ageLOC Galvanic Facial Spa and ageLOC Body Spa systems are registered as “health care equipment” or “household appliances,” which enables us to market and sell them through our direct sales channel in that market. The process for registering products for the direct sales channel in Mainland China is subject to delays. However, this process and registration requirement do not apply to all of our sales channels in Mainland China; although our independent direct sellers are prohibited from earning commissions by selling products that are not so registered, sales by our sales employees or independent marketers are not subject to this requirement. Please refer to Item 1A. Risk Factors for more information on the regulatory risks associated with our Pharmanex BioPhotonic Scanner, ageLOC LumiSpa and ageLOC Spa systems.device products.
The markets for our products are highly competitive. Our competitors include a broad array of marketers of beauty and wellness products and pharmaceutical companies, such as L’Oréal, Clinique, Estée Lauder, Nature’s Way, Avon Products and Mary Kay, many of which have longer operating histories and greater name recognition and financial resources than we do. We compete in these markets by emphasizing the innovation, value and premium quality of our products and the reach, convenience and customer servicing of our distribution system.
Direct Selling
We compete with other direct selling organizations,companies, some of which have a longer operating history, and greater visibility, name recognition and financial resources than we do. Leading global direct selling companies include Amway, Avon ProductsNatura Cosmeticos and Herbalife. We also compete with local direct selling companies. For example, leading direct selling companies in Mainland China include Joymain and Sunhope.the markets in which we operate. We compete with these companies to attract and retain our sales force and consumers based on the strength of our product offerings, sales compensation, multiple business opportunities, management and international operations.
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As of December 31, 2019,2022, we had approximately 4,9003,800 full- and part-time employees worldwide. This does not include approximately 20,0009,600 sales employees in our Mainland China operations. Although we have statutory employee representation obligations in certain markets, our employees are generally not represented by labor unions except where expressly required by law. We believe that our relationship with our employees is good, and we do not foresee a shortage in qualified personnel necessary to operate our business.
Our human capital objectives include the following:
Culture. All of our full- and part-time employees are responsible for upholding the Nu Skin Code of Conduct and for striving to perpetuate the Nu Skin Way, our global culture aspiration, which includes the following principles:
● | A force for good | ● | Direct and decisive | |
● | Accountable and empowered | ● | Exceptional | |
● | Bold innovators | ● | Fast speed | |
| ● | Customer obsessed | ● | One global team |
Hiring, Engagement, Development and Retention. We seek to hire and retain employees with the talents and capabilities to succeed at our company. The level of competition for qualified employees is high, owing to employment market trends both internationally and in Utah, where our corporate headquarters are located and which has one of the lowest unemployment rates in the United States. These conditions have made it more difficult for us to fill some job positions and retain employees. We address this issue by building a strong employer brand, allowing remote work options to reach potential employees in other locations, and providing competitive compensation and benefits.
Developing our employees and keeping them engaged is crucial. We pursue these objectives by providing leadership training, encouraging managers to conduct one-on-one meetings with employees, holding town hall meetings to promote dialogue between management and employees, and reinforcing the Nu Skin Way to maintain an invigorating and attractive culture. We conduct a global employee experience survey every six months to obtain our employees’ feedback, which helps to guide our human capital initiatives and to maintain robust employee engagement.
Diversity, Equity and Inclusion. We believe a diverse, equitable and inclusive work environment allows us to benefit from unique perspectives and provides vitality, creativity, new ideas and growth. We are committed to our Diversity, Equity and Inclusion vision statement: “We believe we are a force for good as we seek, develop and empower diverse individuals and perspectives. We aspire to be a global community where every employee, entrepreneur and consumer knows and feels they belong.”
We have established employee resource groups to help ensure that under-represented populations feel welcome at Nu Skin, including people of color, LGBTQIA+ individuals and women. Our Healthy Workplace Policy also aims to cultivate a culture of mutual respect and to provide all employees a work environment free from harassment, discrimination and unprofessional behavior. Our employees receive training on their responsibility in this important area, and we make a Healthy Workplace Hotline available for employees to report concerns anonymously.
We also incorporate DEI practices into our hiring process. We conduct training to create awareness of unintentional biases that may be present in the hiring process. We have partnered with universities and other institutions of higher learning to expand our talent pool, all while being cognizant of the wording of our job postings to be inclusive and utilizing multiple broad-based candidate search engines to increase our access to diverse candidates.
Employee Health and Well-Being. Our employees’ health and well-being is an essential component of our human capital management strategy. We established “The Best You” wellness program in the United States to improve the quality of each employee’s physical, emotional, intellectual and financial wellness by encouraging and incentivizing healthy lifestyle practices through health screenings, prevention programs and education. Our employees also receive free product benefits, including our wellness products. Employees at our corporate headquarters also have access to an on-site gym, as well as our employee assistance program, which includes free counseling services.
Our Board’s committees engage with our senior management and head of Human Resources regarding human capital management on a regular basis. Working with management, our Board’s committees oversee and receive reports on matters including culture, compensation, benefits, key talent succession planning, employee engagement, and DEI. In addition, each year, our management reports to the Compensation and Human Capital Committee on management’s annual assessment of risks related to our compensation policies and practices.
Evidencing the success of our human capital management initiatives, Nu Skin was certified in 2022 as a Most Loved Workplace®, based on research from the Best Practice Institute on companies where employees are the happiest and most satisfied. Nu Skin also made the Forbes magazine list of America’s Best Employers for 2022.
In addition to our employees, our human capital resources also include our sales force. For information about our sales force, see Item 1. Business—“Distribution Channel.”
Our website address is www.nuskin.com. We make available, free of charge on our Investor Relations website, ir.nuskin.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
We also use our Investor Relations website, ir.nuskin.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, Securities and Exchange Commission filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.
We have adopted a Code of Conduct that applies to all of our employees, officers and directors, including those of our subsidiaries. Our Code of Conduct is available in the “Corporate Governance” section of our Investor Relations website at ir.nuskin.com. In addition, stockholders may obtain a copy, free of charge, by making a written request to Investor Relations, Nu Skin Enterprises, Inc., 75 West Center Street, Provo, Utah 84601. Any amendments or waivers (including implicit waivers) regarding the Code of Conduct requiring disclosure under applicable SEC rules or NYSE listing standards will be disclosed in the same section of our website.
Our executive officers as of January 31, 2020February 14, 2023 are as follows:
| Name | Age | Position | ||
| Steven J. Lund | Executive Chairman of the Board | |||
| Ryan S. Napierski | President and Chief Executive Officer | |||
| Connie Tang | 52 | Executive Vice President, Chief Global Growth and Customer Experience Officer | ||
| Mark H. Lawrence | Executive Vice President and Chief Financial Officer | |||
| Joseph Y. Chang | Executive Vice President | |||
| Chayce D. | Executive Vice President and General Counsel | |||
| Steven K. Hatchett | 51 | Executive Vice President and |
Steven J. Lund has served as Executive Chairman of our board of directors since 2012. Mr. Lund previously served as Vice Chairman of our board of directors from 2006 to 2012 and as President, Chief Executive Officer and a member of our board of directors from 1996, when we went public, until 2003. Mr. Lund was a founding stockholder of our company. Mr. Lund is a trustee of the Nu Skin Force for Good Foundation, a charitable organization established in 1996 by our company to help encourage and drive the philanthropic efforts of our company and its sales force and employees to enrich the lives of others. Mr. Lund worked as an attorney in private practice prior to joining our company as Vice President and General Counsel. He received a B.A. degree from Brigham Young University and a J.D. degree from Brigham Young University’s J. Reuben Clark Law School.
Ryan S. Napierski has served as our Company’s President since 2017.2017 and as our CEO since September 2021. Previously, he served as President of Global Sales and Operations from 2015 to 2017. Prior to serving in that position, he served as both President of our North Asia region since 2014 and President of Nu Skin Japan since 2010. Mr. Napierski has fulfilled multiple leadership positions for Nu Skin since joining our company in 1995, including Vice President of Business Development for Nu Skin EMEA and General Manager of the United Kingdom. Mr. Napierski has a Bachelor’s degree in business, a Master’sMaster of Business Administration degree in business administration from Duke University and a Master’s degree in international business from Goethe Universitat in Germany.
Connie Tang has served as our Executive Vice President, Chief Global Growth and Customer Experience Officer since April 2021. From 2012 to 2019, she served as president and CEO of Princess House, a kitchen products company that markets and sells its products through the direct selling channel, and she founded Gritty Executive Consulting, LLC in 2020. Previously, she served as president of the U.S. division of JAFRA Cosmetics and in management roles at BeautiControl. Ms. Tang received a B.A. degree from City University of New York – Brooklyn College.
Mark H. Lawrence has served as our Chief Financial Officer since 2017. From 2016 to 2017, Mr. Lawrence served as vice president of finance for the Innovation Center at Vivint Smart Home, a home automation company. From 2013 to 2016, Mr. Lawrence was head of finance at Amazon Lab126, a consumer electronics research and development company that is a subsidiary of Amazon.com. During 2013, he served as senior vice president of worldwide finance at Polycom, a voice and video communications company, and from 2002 to 2013 he served in various financial positions at Brocade Communications Systems, a networking hardware, software and services company. Mr. Lawrence holds a bachelor’sBachelor’s degree from Brigham Young University and a Master of Business Administration degree from the University of California, Davis.
Joseph Y. Chang has served as our Chief Scientific Officer and Executive Vice President of Product Developmentand Chief Scientific Officer since 2006. Dr. Chang served as President of our Pharmanex division from 2000 to 2006. From 1997 to 2000, he served as Vice President of Clinical Studies and Pharmacology of Pharmanex. Dr. Chang has over 35approximately 40 years of experience in the pharmaceutical experience.and/or dietary supplement industries. He received a B.S. degree from Portsmouth University and a Ph.D. degree from the University of London.
Chayce D. Matthew DornyClark has served as our Executive Vice President and General Counsel and Secretary since 2003.August 2021. Mr. Dorny previously servedClark joined our company in 2015 as Assistant General Counsel from 1998 to 2003.and later served as Vice President and Deputy General Counsel before beginning his current role. Prior to joining us, Mr. Dornyour company, he was a securities and businesslitigation attorney in private practice in Salt Lake City, Utah. Mr. DornyHe received B.A., M.B.A.a B.S. degree from Southern Utah University and a J.D. degreesdegree from the University of Utah.
Steven K. Hatchett joined our company in 2018 and served as Senior Vice President of Global Manufacturing until January 2021, when he began serving as Senior Vice President of Global Products. He became Executive Vice President and Chief Product Officer in January 2022. From 2015 to 2018, he served as CEO of a nutritional supplement manufacturer that our company acquired in 2018, at which time he began serving as president until December 2020. Previously, he served as vice president of manufacturing and product innovation at Forever Living Products, and as CEO and president at Cornerstone Research and Development.
Risk Factor Summary
We are providing the following summary of the risk factors contained in this Annual Report on Form 10-K to enhance the readability and accessibility of our risk factor disclosures. We encourage you to carefully review the full risk factors contained after this summary for additional information regarding the material factors that make an investment in our securities speculative or risky. These risks include the following:
Risks Associated with Direct Selling and Our Sales Force
| ● | Challenges to the form of our network marketing system or to our business practices could harm our business. |
| ● | Laws and regulations may prohibit or severely restrict direct selling and cause our revenue and profitability to decline, and regulators could adopt new regulations that harm our business. |
| ● | Improper sales force actions could harm our business. |
| ● | Social media platforms’ decisions to prohibit, block or decrease the prominence of our sales force’s content could harm our business. |
| ● | If our business practices or policies or the actions of our sales force are deemed to be in violation of applicable local regulations regarding foreigners, then we could be sanctioned and/or required to change our business model, which could significantly harm our business. |
| ● | Our sales compensation plans or other incentives could be viewed negatively by some of our sales force, could be restricted by government regulators, and could fail to achieve desired long-term results and have a negative impact on revenue. |
| ● | Limits on the amount of sales compensation we pay could inhibit our ability to attract and retain our sales force, negatively impact our revenue and cause regulatory risks. |
| ● | We may be held responsible for certain taxes, assessments and other requirements relating to the activities of our sales force, which could harm our financial condition and operating results. |
Risks Associated with Our Operations in Mainland China
| ● | Our operations in Mainland China are subject to significant government scrutiny, and we could be subject to fines or other penalties. |
| ● | If direct selling regulations in Mainland China are modified, interpreted or enforced in a manner that results in negative changes to our business model or the imposition of a range of potential penalties, our business could be significantly negatively impacted. |
| ● | Our ability to expand our business in Mainland China could be negatively impacted if we are unable to obtain additional necessary national and local government approvals in Mainland China. |
| ● | If we are not able to register products for sale in Mainland China, our business could be harmed. |
Risks Associated with Market Conditions and Competition
| ● | Our markets are intensely competitive, and market conditions and the strengths of competitors may harm our business. |
| ● | Adverse publicity concerning our business, marketing plan, products or people could harm our business and reputation. |
| ● | Inability of products, platforms, business opportunities and other initiatives to gain or maintain sales force and market acceptance could harm our business. |
| ● | Product diversion may have a negative impact on our business. |
Risks Associated with COVID-19
| ● | Epidemics, including COVID-19, and other crises have and may continue to negatively impact our business. |
International Risks
| ● | Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks. |
| ● | We are subject to financial risks as a result of our international operations, including exposure to foreign-currency fluctuations, currency controls and inflation in foreign markets, all of which could impact our financial position and results of operations. |
| ● | Potential changes to tariff and import/export regulations, and ongoing trade disputes between the United States and other jurisdictions may have a negative effect on global economic conditions and our business, financial results and financial condition. |
Human Capital Risks
| ● | If we are unable to retain our existing sales force and recruit additional people to join our sales force, our revenue may not increase and may even decline. |
| ● | We depend on our key personnel and Sales Leaders, and the loss of the services provided by any of our executive officers, other key employees or key Sales Leaders could harm our business and results of operations. |
Risks Associated with Our Manufacturing and Operations
| ● | Production difficulties, quality control problems, inaccurate forecasting, shortages in ingredients, and reliance on our suppliers could harm our business. |
| ● | The loss of or a disruption in our manufacturing, supply chain and distribution operations, or significant expenses or violations incurred by such operations, could adversely affect our business. |
| ● | Our business could be negatively impacted if we fail to execute our product launch process or ongoing product sales due to difficulty in forecasting or increased pressure on our supply chain, information systems and management. |
| ● | If we are unable to effectively manage our growth in certain markets, our operations could be harmed. |
| ● | System failures, capacity constraints and other information technology difficulties could harm our business. |
| ● | Any acquired companies or future acquisitions may expose us to additional risks. |
Product Legal and Regulatory Risks
| ● | Regulations governing our products, including the formulation, registration, pre-approval, marketing and sale of our products, could harm our business. |
| ● | Government regulations and private party actions relating to the marketing and advertising of our products and services may restrict, inhibit or delay our ability to sell our products and harm our business. |
| ● | Our operations could be harmed if we fail to comply with Good Manufacturing Practices. |
| ● | If our current or any future device products are determined to be medical devices in a particular geographic market, or if our sales force uses these products for medical purposes or makes improper medical claims, our ability to continue to market and distribute such devices could be harmed, and we could face legal or regulatory actions. |
| ● | We may incur product liability claims that could harm our business. |
Legal, Regulatory and Compliance Risks
| ● | We may become involved in legal proceedings and other matters that could adversely affect our operations or financial results. |
| ● | Non-compliance with anti-corruption laws could harm our business. |
| ● | A failure of our internal controls over financial reporting or our regulatory compliance efforts could harm our stock price and our financial and operating results or could result in fines or penalties. |
Risks Associated with Taxes, Customs and Debt
| ● | We are subject to changes in tax and customs laws, changes in our tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities, which could have a material and adverse impact on our effective tax rate, operating results, cash flows and financial condition. |
| ● | Government authorities may question our tax or customs positions or change their laws in a manner that could increase our effective tax rate or otherwise harm our business. |
| ● | A decline in our business could adversely affect our financial position and liquidity. |
Intellectual Property Risks
| ● | We may be subject to claims of infringement on the intellectual property rights or trade secrets of others, resulting in costly litigation. |
| ● | If we are unable to protect our intellectual property rights or our proprietary information and know-how, our ability to compete could be negatively impacted and the value of our products could be adversely affected. |
Data Security and Privacy Risks
| ● | Cyber security risks and the failure to maintain the integrity of company, employee, sales force or guest data could expose us to data loss, litigation, liability and harm to our reputation. |
Sustainability Risks
| ● | Our business could be negatively impacted by corporate citizenship and sustainability matters. |
Risks Related to Our Common Stock
| ● | The market price of our Class A common stock is subject to significant fluctuations due to a number of factors that are beyond our control. |
General Risk Factors
| ● | Difficult economic conditions could harm our business. |
Risk Factors
We face a number of substantial risks. Our business, financial condition or results of operations could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, which should be considered together with the other items in this Annual Report on Form 10-K, including Item 1. Business and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Risks Associated with Direct Selling and Our Sales Force
Challenges to the form of our network marketing system or to our business practices could harm our business.
We may be subject to challenges by government regulators regarding the form of our network marketing system. Legal and regulatory requirements concerning the direct selling industry generally do not include “bright line” rules and are inherently fact-based and subject to interpretation. As a result, regulators and courts have discretion in their application of these laws and regulations, and the enforcement or interpretation of these laws and regulations by government agencies or courts can change.
Recent settlements between the FTCU.S. Federal Trade Commission (“FTC”) and other direct selling companies and guidance from the FTC have addressed inappropriate earnings and lifestyle claims, problematic compensation structures and the importance of focusing on consumers. These developments have created ambiguity as to the proper interpretation of the law and related court decisions. AnyThe FTC has been active in its enforcement activities, and any adverse rulings or legal actions could impact our business if direct selling laws or anti-pyramid laws are interpreted more narrowly or in a manner that results in additional burdens or restrictions on direct selling companies. For example:
| ● | In 2015, the FTC took aggressive actions against a multi-level marketing company, alleging an illegal business model and inappropriate earnings claims. |
| ● | In 2016, the FTC entered into a settlement with a multi-level marketing company, requiring the company to modify its business model, including basing sales compensation and qualification only on sales to retail and preferred customers and on purchases by a distributor for personal consumption within allowable limits. Although this settlement does not represent judicial precedent or a new FTC rule, the FTC has indicated that the industry should look at this settlement, and the principles underlying its specific measures, for guidance. |
| ● | In |
| ● | During 2020 to 2022, the FTC issued letters that warned several direct-selling companies to remove and address claims that they or members of their sales force were making about their products’ ability to treat or prevent COVID-19 and/or about the earnings that people who have recently lost income could make. |
| ● | In 2021, the FTC sent a notice to more than 1,100 companies, including us and two of our subsidiaries (Pharmanex, LLC and Big Planet, Inc.), that outlined several practices that the FTC determined to be unfair or deceptive in prior administrative cases. These practices relate to earnings claims, other money-making opportunity claims, and endorsements and testimonials. Pursuant to the FTC’s “penalty offense authority,” companies that received the notice are expected to comply with the standards set in the prior administrative cases and could incur significant civil penalties if they or their representatives fail to do so. The penalties could be up to $46,517 per violation, and there is some ambiguity in how a “violation” would be defined for these purposes. |
| ● | In 2022, the FTC issued an Advanced Notice of Proposed Rulemaking (“ANPR”) indicating that it is considering proposing a rule regarding earnings claims. The ANPR also suggested, among other things, that the FTC might not consider a disclaimer (such as “results not typical”) to be sufficient to correct a misleading impression from an atypical earnings claim. |
Although we take steps to educate our distributorssales force on proper claims, if members of our distributorssales force make improper claims, or if regulators determine we are making any improper claims, this could lead to an FTC investigation and could harm our business. In this regard, FTC’s increased scrutiny of disclaimers, as discussed in the ANPR, could lead to more FTC actions regarding improper claims.
In addition, if the requirements related to compensation structures in the actions listed above lead to new industry standards or new rules, or if they limit the levels in the network for which payments can be made, our business could be impacted and we may need to amend our global sales compensation plan. With a majority of our revenue in the United States coming from sales to retail customers and preferred customers, and distributors who have never sponsored other distributors, we believe that we can demonstrate consumer demand for our products, but we continue to monitor developments to assess whether we should make any changes to our business or global sales compensation plan. If we are required to make changes or if the FTC seeks to enforce similar measures in the industry, either through rulemaking or an enforcement action against our company, our business could be harmed.
We could also be subject to challenges by private parties in civil actions. We are aware of civil actions against other direct-selling companies in the United States that have resulted, and may in the future resultedresult, in significant settlements. Allegations by short sellers directed at us and our competitors regarding the legality of multi-level marketing in various markets and adverse media reports have also created intense public scrutiny of us and our industry. Our business has also been subject to formal and informal inquiries from various government regulatory authorities in the past regarding our business and our compliance with local laws and regulations. Consumer protection groups also generate media and regulatory scrutiny of companies in our industry through regulatory referrals and other channels of publicity. All of these actions and any future scrutiny of us or our industry could generate negative publicity or further regulatory actions that could result in fines, restrict our ability to conduct our business in our various markets, enter into new markets, motivate our sales force and attract consumers.
Various government agencies throughout the world regulate direct sales practices. Laws and reputation.
| ● | impose requirements related to sign-up, order cancellations, product returns, inventory buy-backs and cooling-off periods for our sales force and consumers; |
| ● | require us, or our sales force, to register with government agencies; |
| ● | impose limits on the amount of sales compensation we can pay; |
| ● | impose reporting requirements; and |
| ● | require that our sales force is compensated for selling products and not for recruiting others. |
Complying with these widely varying and consumerssometimes inconsistent rules and our results of operationsregulations can be particularly impacted by adverse publicity regarding us, the nature ofdifficult, time-consuming and expensive, and requires significant resources. The laws and regulations governing direct selling are modified from time to time, and like other direct selling companies, we are subject from time to time to government inquiries and investigations in our various markets related to our direct selling activities. This can require us to make changes to our business models,model and aspects of our productssales compensation plan in the markets impacted by such changes and investigations. During 2021, the FTC announced that it is initiating a review of its Business Opportunity Rule, which imposes certain obligations on business opportunity sellers in their dealings with prospective buyers; the FTC issued a request for public comment on this rule in November 2022. Currently, multi-level marketing companies are exempted from this rule. If this exemption is eliminated or if new regulations are adopted for multi-level marketing companies, it could negatively impact the actionsgrowth of our sales force and employees. Given the nature of our operations, lack of clarity on applicable legal requirements and standards, and our continuous needrevenue. In addition, markets where we currently do business could change their laws or regulations to recruit and retain consumers and members of our sales force, we are particularly vulnerable to adverse publicity. Specifically, we are susceptible to adverse publicity concerning:
If direct selling regulations in Mainland China are modified, interpreted or enforced in a manner that results in negative changes to our business model or the imposition of a range of potential penalties, our business would be significantly negatively impacted.
Improper sales force actions could harm our business.
Sales force activities that violate applicable laws, regulations or regulationspolicies, or that are alleged to do so, have, and could resultin the future, harmed our business and reputation and resulted in government or third-party actions against us, which could harm our business.us.
For example, in 2014, allegations were made by various media outlets that certain of our sales representatives in Mainland China failed to adequately follow and enforce our policies and regulations. In response to theseThis adverse publicity, as well as a government review and other allegations, Chinese regulators commenced a review of our business in Mainland China. In response to this media scrutiny and government review,actions that we voluntarily took a number of actionsto address the situation, resulted in Mainland China, including temporarily suspending our business meetings, temporarily suspending acceptance of applications for any new sales representatives, and extending our product refund and return policies. The adverse publicity and suspension of business meetings and acceptance of applications had a significant negative impact on our revenue and the number of Sales Leaders and Customers in the region. Similar or more extreme actions by government agencies in Mainland China or other markets in the future could have a significant adverse impact on our business and results of operations.
The direct selling industry in Japan continues to experience regulatory and media scrutiny, and other direct selling companies have been suspended from sponsoring activities in the past.activities. Japan imposes strict requirements regarding how distributorsBrand Affiliates approach prospective customers. From time to time, we receive warningsinformation from consumer centers in certain prefectures about the number of general inquiries and complaints about us and our distributors. As a result,Brand Affiliates, and we also sometimes receive warnings to reduce such complaints. Based on this information, we continually evaluate and enhance our distributorBrand Affiliate compliance, education and training efforts in Japan. However, we cannot be certain that our efforts will successfully prevent regulatory actions against us, including fines, suspensions or other sanctions, or that the company and the direct selling industry will not receive further negative media attention, all of which could harm our business.
Except in Mainland China, members of our sales force are not employees and act independently of us. The most significant area of risk for such activities relates to improper product claims and claims regarding the business opportunity of joining our sales force. For example:
| ● | During 2020 to 2022, the FTC issued letters that warned several direct-selling companies to remove and address claims that they or members of their sales force were making about their products’ ability to treat or prevent COVID-19 and/or about the earnings that people who have recently lost income could make. |
| ● | In 2021, the FTC sent a notice to more than 1,100 companies, including us and two of our subsidiaries (Pharmanex, LLC and Big Planet, Inc.), that outlined several practices that the FTC determined to be unfair or deceptive in prior administrative cases. These practices relate to earnings claims, other money-making opportunity claims, and endorsements and testimonials. Pursuant to the FTC’s “penalty offense authority,” companies that received the notice are expected to comply with the standards set in the prior administrative cases and could incur significant civil penalties if they or their representatives fail to do so. The penalties could be up to $46,517 per violation, and there is some ambiguity in how a “violation” would be defined for these purposes. |
We implement strict policies and procedures to ensure our sales force complies with legal requirements. However, given the size of our sales force, we experience problems from time to time. For example, product claims made by some of our sales force in 1990 and 1991 led to a United States Federal Trade Commission (“FTC”)FTC investigation that resulted in our entering into atwo consent agreementagreements with the FTC and various agreements with state regulatory agencies. In addition, rulings by the South Korean FederalFair Trade Commission and by judicial authorities against us and other companies in South Korea indicate that, if our sales force engages in criminal activity, we may be held liable or penalized for failure to supervise them adequately. Our sales force may attempt to anticipate which markets we will open in the future and begin marketing and sponsoring activities in markets where we are not qualified to conduct business. We could face fines, suspensions or other legal action if our sales force violates applicable laws and regulations, and our reputation and brand could be negatively impacted.
Social media platforms’ decisions to prohibit, block or decrease the prominence of our sales force’s content could harm our business.
Social media platforms have, and could decidein the future, decided to prohibit, block or decrease the prominence of our sales force’s content for any reason, includingreason. For example, due to concerns with multi-level marketing, the TikTok and WhatsApp Business platforms’ policies prohibit content related to multi-level marketing. In addition, Pinterest and Facebook prohibit ads that promote multi-level marketing opportunities, and Pinterest has also imposed restrictions on weight loss products, claims and photos. Our business is becoming increasingly dependent on social commerce. Additional social media platforms’ adoption of similar or stricter policies could significantly hamper our sales force’s ability to promote our products and attract consumers, which could cause our revenue to decline. Our reputation could also be harmed if our sales force violates theany social media platform’s policies.
If our business practices or policies or the actions of our sales force are deemed to be in violation of applicable local regulations regarding foreigners, then we could be sanctioned and/or required to change our business model, which could significantly harm our business.
Our sales force is required to comply with work authorization and other local legal requirements prior to working in a market. Some markets, including Mainland China and Vietnam, also prohibit or restrict participation of foreigners in direct selling activities. We have implemented policies that are designed to comply with these regulations and inform our sales force regarding the types of activities that are not permitted. However, we cannot assure that actions of our sales force will not violate local laws or regulations or our policies. If our business practices or policies or the actions of our sales force are deemed to be in violation of applicable regulations as they may be interpreted or enforced, then we could be sanctioned and/or required to change our business model, which could result in adverse publicity and significantly harm our business.
In addition, we have been required to modify our sales compensation plan in certain markets, including South Korea and Vietnam, from time to time to remain in compliance with applicable sales compensation limits. Changes to reduce sales compensation have had a negative impact on the sales force in the product launch process or for ongoing product sales, our reputationpast and profitability could be negatively impacted.in the future.
Limits on the amount of sales compensation we pay could inhibit our ability to attract and retain our sales force, negatively impact our revenue and cause regulatory risks.
Several markets, including Mainland China, South Korea, Indonesia and Vietnam, impose limits on the amount of sales compensation we can pay to our sales force. For example, under regulations in Mainland China, direct selling companies may pay independent direct sellers in Mainland China up to a maximum 30% of the revenue they generate through their own sales of products to consumers. Additionally, in South Korea, local regulations limit sales compensation to 35% of ourthe total valueprice of goods or services supplied in South Korea. These regulations may limit the incentive for people to join our sales force and may reduce our ability to differentiate ourselves from our competitors in attracting and retaining our sales force.
In addition, we have been required to modify our sales compensation plan in certain markets, including South Korea and Vietnam, from time to time to remain in compliance with applicable sales compensation limits. Because sales compensation, as a percentage of revenue, can fluctuate as sales force productivity fluctuates, we may be required to make further changes to stay within applicable sales compensation limits or may be at risk of exceeding them. In addition, which revenues and expenses are within the scope of these regulations is not always clear, and interpretation and enforcement of these laws are subject to change, which could require us to make further changes or result in non-compliance with these regulations. Any failure to keep sales compensation within legal limits in Mainland China, South Korea, Indonesia, Vietnam or any other market that imposes a sales compensation limit could result in fines or other sanctions, including suspensions.
We are subject to the risk in some jurisdictions of being responsible for social security taxes, withholding or other taxes, minimum wage laws, and related assessments and penalties with respect to our sales force. This would occur if a jurisdiction classifies our sales force as our employees rather than as independent contractors, or if a jurisdiction expands the categories of personnel to whom these tax obligations apply.
| ● | The laws and interpretations regarding “independent contractor” status in certain jurisdictions, including the United States, continue to evolve, and in some cases, authorities have sought to apply these laws unfavorably against gig economy, platform and direct selling companies. For example, in October 2022, the U.S. Department of Labor proposed a regulation that, if adopted, would alter the employee vs. independent contractor analysis in a way that could potentially cause more workers to be classified as employees. |
| ● | In addition, some jurisdictions have, without challenging the “independent contractor” status, taken the position that direct sellers must nonetheless pay certain taxes with respect to payments to their sales force. |
In the event that local laws and regulations, or the interpretation of local laws and regulations, require us to treat members of our sales force as employees rather than independent contractors (or to comply with similar requirements regardless of whether our sales force is classified as employees), this could harm our financial condition and operating results. This risk increases as our sales force increases its use of social sharing, as several jurisdictions’ regulations protect in-person or in-home sales demonstrations from creating an employment relationship but are less protective of online demonstrations. If our Brand Affiliates were deemed to be employees rather than independent contractors, we would also face the risk of increased liability for their actions.
Our Sales Leaders could also face similar risks with respect to the Brand Affiliates in their sales organizations who may claim they are employees of the Sales Leader rather than independent contractors or independent business owners, which could impact their sales operations or lead them to cease their participation in our business.
Risks Associated with Our Operations in Mainland China
Our operations in Mainland China are subject to significant government scrutiny, and we could be subject to fines or other penalties.
Our operations in Mainland China are subject to significant regulatory scrutiny. The legal system in Mainland China provides government authorities broad latitude to conduct investigations, and many Chinese regulations, including those governing our business, are subject to significant interpretation, which may vary from jurisdiction to jurisdiction. Because of significant government concerns in Mainland China regarding improper direct selling activities, government regulators closely scrutinize activities of direct selling companies and activities that resemble direct selling. The government in Mainland China continues to inspect and review companies in the direct selling industry on a regular basis. We believe the regulatory environment in Mainland China is becoming increasingly challenging and will continue to be so over the medium and long terms.
The government’s scrutiny of activities within the health products and services may restrict, inhibit or delaydirect selling industries has been at higher levels since 2019, when the government conducted a 100-day campaign to review and inspect the health products and direct selling industries following negative media coverage generated by the healthcare-related product claims made by another direct selling company in Mainland China. Since 2019, we have been receiving and addressing an increased number of government reviews, inspections, and inquiries and consumer complaints in Mainland China; our ability to sell our productshold certain business meetings has been limited; and harm our business.negative media coverage has spread to include additional companies, including ours.
Government authorities regulate advertisingregulators frequently make inquiries into our business activities and product claimsinvestigate complaints from consumers and others regarding our business. Some of these inquiries and investigations in the efficacy and benefitspast have resulted in the payment of fines by us or members of our products. These regulatory authorities typically require adequatesales force, interruption of sales activities and reliable scientific substantiation to support any marketing claims. What constitutes such reliable scientific substantiation can vary widely from market to market and there is no assurancewarnings. Any determination by government regulators in these inquiries or investigations that the research and development efforts that we undertake to support our claims will be deemed adequate for any particular productoperations or claim. If we are unable to show adequate and reliable scientific substantiation for our product claims, or our marketing materialsactivities, or the marketing materialsactivities of our sales force, make claims that exceed the scope are not in compliance with applicable regulations could result in substantial fines, extended interruptions of allowed claims for dietary supplements, cosmetics or devices that we offer, the United States Foodbusiness, and Drug Administration ( the “FDA”) ortermination of necessary licenses and permits, including our direct selling and other regulatory authorities could take enforcement action requiring us to revise our marketing materials, amend our claims or stop selling certain products,licenses, all of which could harm our business.
We train our sales force in Mainland China on how our Mainland China business model differs from our global business model. However, Sales Leaders in Mainland China may attend regional and global events or interact with Sales Leaders from other markets. Although our global model and Mainland China business model differ, mistakes may be made as to how those working in Mainland China should promote the business in Mainland China. These mistakes by our sales force, or allegations of such mistakes, have, and may in the future, led to government reviews and investigations of our operations in Mainland China, as well as adverse publicity, reputational harm and adjustments or interruptions to our operations, all of which has and could in the future have a significant negative impact on our revenue and the number of Sales Leaders and Customers in the region.
If direct selling regulations in Mainland China are modified, interpreted or enforced in a manner that results in negative changes to our business model or the imposition of a range of potential penalties, our business could be significantly negatively impacted.
The government of Mainland China has adopted direct selling and anti-pyramiding regulations that impose significant restrictions and limitations on businesses in our industry. Most notably, the regulations prohibit multi-level compensation, which is the basis of how we compensate our sales force outside of Mainland China. The regulations also prohibit overseas personnel from participating in direct selling in Mainland China. We have structured our business model in Mainland China based on several factors: the guidance we have received from government officials, our interpretation of applicable regulations, our understanding of the practices of other international direct selling companies operating in Mainland China, and our understanding as to how regulators are interpreting and enforcing the regulations. Members of our sales force in Mainland China do not participate in our global sales compensation plan but are instead compensated according to a separate compensation model. We generally compensate our Sales Leaders in Mainland China at a level that is competitive with other direct selling companies in the market and comparable to the compensation of our Sales Leaders globally.
Other than our direct selling subsidiary, we also have a separate subsidiary in Mainland China that is a registered independent entity that engages in cross-border e-commerce, through which one of our U.S. subsidiaries can sell a limited selection of products to consumers in Mainland China for their personal consumption. Cross-border e-commerce is separated from the direct selling sales channel in Mainland China. Our Sales Leaders can contract with the China entity, promote this cross-border e-commerce platform to introduce consumers to place orders on this platform, and receive compensation in return. Through this entity, the U.S. subsidiary sells our ageLOC Meta product, which is neither registered for retail sale in Mainland China nor registered specifically as a direct selling product and, therefore, can only be sold to local consumers for their personal consumption and cannot be sold through the direct selling channel. We also plan to begin selling additional products through this channel. Although we take measures (1) to maintain legal separation between our cross-border e-commerce entity and our direct selling entity; and (2) to ensure the products sold on our cross-border e-commerce platform are for consumers’ personal consumption only, our business in Mainland China could be negatively impacted if regulatory authorities elect to attribute these cross-border e-commerce sales activities and related product claims, or the accompanying actions of our sales force, to our direct selling business, and make a determination they are in violation of direct selling or other applicable laws.
Our Mainland China business also has an e-commerce platform in which it sells products directly to customers. The products we sell on this platform are registered for retail sale in Mainland China, but they are not registered for the direct selling channel. We permit members of our sales force, as non-direct sellers, to promote this platform and refer customers to it, in addition to their participation in our direct selling business. They receive a promotion bonus based on our sales on this platform to customers they have referred. Although the promotion bonus is calculated separately from our sales force’s compensation for direct selling, it is possible that our business in Mainland China could be negatively impacted if regulatory authorities elect to attribute these e-commerce sales activities and the promotion bonus to our direct selling business.
The nature of the political, regulatory and legal systems in Mainland China gives regulatory agencies at both the local and central levels of government broad discretion to interpret and enforce regulations as they deem appropriate to promote social stability. We face a risk that regulators may change the way in which they currently interpret and enforce the direct selling regulations, or that such regulations may be modified. If our business practices are deemed to be in violation of applicable regulations as they may be interpreted or enforced, in particular our use of the sales productivity of a Sales Leader him/herself and of the sales force that such Sales Leader trains, collaborates with, supports and services in setting his/her salary or service fee and determining their position/title on a quarterly basis, then we could be sanctioned, required to change our business model, and/or have our direct selling license revoked, any of which could significantly harm our business. We believe the regulatory environment in Mainland China is becoming increasingly challenging and will continue to be so over the medium and long terms. We currently plan to implement certain changes to the structure of our sales compensation in Mainland China due to the evolving commercial and regulatory environment. These changes could have a negative impact on our sales in that market.
In January 2019, the Mainland China government announced a 100-day campaign to review and inspect the health products and direct selling industries. This campaign involved a number of regulatory agencies. Since the 100-day period ended, there has continued to be a heightened level of regulatory scrutiny of these industries and of our business and products. For example, government authorities have not been issuing new licenses for direct selling since the beginning of the 100-day action in early 2019. There is also uncertainty whether any changes to the regulations that apply to these industries will be made based on the review. If changes are made to any of the regulations that apply to our business model, products or operations, our business could be harmed.
Our ability to expand our business in Mainland China could be negatively impacted if we are unable to obtain additional necessary national and local government approvals in Mainland China.
To expand our direct selling model into additional provinces in Mainland China, we currently must obtain a series of approvals from district, city, provincial and national government agencies with respect to each province in which we wish to expand. Government authorities have not been issuing new licenses since the beginning of the 100-day action in early 2019. When the process for obtaining government approvals to conduct direct selling is operational, it often evolves and is lengthy, as we are required to work with a large number of provincial, city, district and national government authorities. The complexity of the approval process as well as the government’s continued cautious approach as direct selling develops in Mainland China makes it difficult to predict the timeline for obtaining these approvals. Furthermore, any media or regulatory scrutiny of our business in Mainland China could increase the time and difficulty we may face in obtaining additional licenses. If media or regulatory scrutiny of our business in Mainland China results in significant delays in obtaining licenses elsewhere in Mainland China, or if the current processes for obtaining approvals are delayed further for any reason or are changed or interpreted differently than currently understood, our ability to receive direct selling licenses in Mainland China and our growth prospects in this market could be negatively impacted.
If we are not able to register products for sale in Mainland China, our business could be harmed.
We face lengthy timelines with respect to product registrations in Mainland China. The process for obtaining product permits and licenses may require extended periods of time that may prevent us from launching new product initiatives in Mainland China on the same timelines as other markets around the world. For example, a vast majority of products marketed in Mainland China as “health foods” are subject to extensive laboratory and clinical analysis by government authorities, and with a few exceptions, the product registration process in Mainland China takes a minimum of two years and may be substantially longer. We market both “health foods” and “general foods” in Mainland China. There is some risk associated with the common practice in Mainland China of marketing a product as a “general food” while seeking “health food” classification. If government officials feel the categorization of our products is inconsistent with product claims, form of delivery, ingredients or function, we could be prohibited or limited in marketing such products in Mainland China in their current form.
As we expand our direct selling channel, we face additional product marketing restrictions compared to our retail store channel. Under applicable direct selling regulations in Mainland China, we can only register products for direct selling if we manufacture them and if they fall within categories that are authorized for direct selling, such as cosmetics, cleaning supplies, health foods, healthcare devices, small kitchen utensils and household appliances. Products that are not registered for direct selling are prohibited from being marketed or sold through our direct sales channel. The process for registering products for the direct sales channel in Mainland China is subject to delays; in fact, government authorities have not been processing new registrations for direct selling since the beginning of the 100-day action in early 2019. Any marketing or sale of non-direct selling products by our independent direct sellers could result in negative publicity, fines and other government sanctions being imposed against us, including if a product is initially classified as a direct selling product but is later re-classified.
Risks Associated with Market Conditions and Competition
Our markets are intensely competitive, and market conditions and the strengths of competitors may harm our business.
The markets for our products are intensely competitive. The success of our products is dependent on our ability to anticipate and respond to market trends and changes in consumer preferences and to maintain a product offering and pipeline that is relevant and priced accessibly to consumers. Our products compete directly with branded, premium retail products and with the products of other direct selling companies, and many of our competitors have much greater name recognition and financial resources than we have, which may give them a competitive advantage. Because of regulatory restrictions concerning claims about the efficacy of beauty and wellness products, we may have difficulty differentiating our products from our competitors’ products, and competing products entering the beauty and wellness market could harm our revenue. In addition, our business may be negatively impacted if we fail to adequately adapt to trends in consumer behavior and technologies to meet consumers’ needs and demands and reach a wider audience.
We also compete with other direct selling companies and gig economy companies to attract and retain our sales force and consumers. Some of these competitors have longer operating histories and greater visibility, name recognition and financial resources than we do. Some of our competitors have also adopted and could continue to adopt some of our successful business strategies, including our global sales compensation plan. Consequently, to successfully compete in this industry, and attract and retain our sales force and consumers, we must ensure that our business opportunities and sales compensation plans are financially rewarding and innovative. Successfully marketing our sales compensation plan in a way that differentiates it from our competitors could become more difficult as the FTC increases its scrutiny of earnings claims and also of disclaimers regarding atypical earnings claims. Although we believe we have significant competitive advantages, we cannot assure that we will be able to continue to successfully compete in this industry.
Adverse publicity concerning our business, marketing plan, products or people could harm our business and reputation.
Growth in our sales force and consumers and our results of operations can be particularly impacted by adverse publicity. Given the nature of our operations, lack of clarity on applicable legal requirements and standards, and our continuous need to recruit and retain consumers and members of our sales force, we are particularly vulnerable to adverse publicity. Specifically, we are susceptible to adverse publicity concerning:
| ● | suspicions about the legality and ethics of network marketing; |
| ● | media or regulatory scrutiny regarding our business and our business models, including in Mainland China; |
| ● | the safety or effectiveness of our or our competitors’ products or the ingredients in such products; |
| ● | inquiries, investigations, fines, legal actions, or mandatory or voluntary product recalls involving us, our competitors, our business models or our respective products; |
| ● | the actions of our current or former sales force and employees, including any allegations that our sales force or employees have overstated or made false product claims or earnings representations, or engaged in unethical or illegal activity; |
| ● | misperceptions about the types and magnitude of economic benefits offered at different levels of sales engagement in our business; and |
| ● | public, governmental or media perceptions of the direct selling, beauty product, or wellness product industries generally. |
These issues have previously resulted in negative publicity and have harmed our business.
Critics of our industry, consumer protection groups, short sellers and other individuals have in the past and may in the future utilize the internet, the press and other means to publish criticisms of the industry, our company and our competitors, or make allegations regarding our business and operations, or the business and operations of our competitors. In some cases, such adverse publicity or allegations can lead to government and regulatory scrutiny. We continue to see adverse publicity regarding our company and the direct selling and healthcare products industries. We or others in our industry may receive similar negative publicity or allegations in the future, and it may harm our business and reputation. Furthermore, the availability of social media channels can increase the likelihood of negative publicity because these channels are an easily accessible public forum. For example, if a member of our sales force makes an improper claim about our products or business opportunity on social media, or if a critic of our company posts negative information about our company on social media, it is more likely to be disseminated widely and potentially noticed by the media or regulators.
Inability of products, platforms, business opportunities and other initiatives to gain or maintain sales force and market acceptance could harm our business.
Our ability to improve our financial performance depends on our ability to proactively anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences regarding products, platforms and business opportunities. Our operating results have been and could be adversely affected if our products, platforms, business opportunities and other initiatives do not generate sufficient enthusiasm and economic benefit to retain our existing consumers and sales force or to attract new consumers and sales force members. For example, during 2022, sales of our ageLOC LumiSpa iO device were below our expectations. Potential factors affecting the attractiveness of our products, platforms, business opportunities and other initiatives include, among other things, shifting consumer demands, perceived product quality and value, similarities to other products, product exclusivity or effectiveness, growth of the gig economy, disruption of retail commerce and e-commerce by social commerce, demographic trends, the strength of our brand and public image, growth of connected commerce, sustainability factors, DEI initiatives, economic success in our business opportunity, the quality and accuracy of the data we use in running our business, our technology infrastructure and capabilities, restrictions in social or digital media for sharing products and attracting consumers, adverse media attention and regulatory restrictions on claims. If we are unable to anticipate changes in consumer preferences and trends, our business, financial condition and operating results could be materially adversely affected. Likewise, if we are unable to anticipate changes in the gig and sharing economies and adapt our business opportunity accordingly, our ability to capture growth trends in the social commerce marketplace could be materially adversely affected.
In addition, our ability to develop and introduce new products could be impacted by, among other things, government regulations, changing policies in social media and other communications platforms, the inability to attract and retain qualified staff, the termination of third-party research and collaborative arrangements, intellectual property of competitors that may limit our ability to offer innovative products or that challenge our own intellectual property, problems related to manufacturing or quality control, and difficulties in anticipating changes in consumer tastes and buying preferences. Our operating results could be adversely impacted if our products fail to gain or maintain sales force and market acceptance or if our successful new products undercut the sales of our other products.
To adapt our business to current macroeconomic trends, we are currently working through a significant digital transformation in our business to achieve widespread adoption of social commerce in all of our markets. This transformation involves the development of new and enhanced digital tools for our Sales Leaders and consumers, including new digital apps and an improved website design and functionality, as well as new products, including connected devices. Our digital transformation will require significant expenditures over the next several years. We face the risk that we will ultimately be unable to develop these items, that their development will be more costly than anticipated, or that the applications and platforms we have and will develop will not meet the expectations of our sales force and/or consumers. Any of these eventualities could have a material negative impact on our business, sales force, consumer development and revenue.
In addition, in our more mature markets, one of the challenges we face is keeping Sales Leaders with established businesses and high-income levels motivated and actively engaged in business building activities and in developing new Sales Leaders. We may also face challenges retaining our sales force as the population of our markets transitions to a younger, millennial/Gen Z demographic, with its associated new and different dynamics of connection through social media platforms, gratification and loyalty behaviors, particularly as this segment becomes a greater share of our revenue. Moreover, if sales through social sharing do not generate repeat purchases or subscriptions at the same rate as other sales, this could create revenue volatility. Many in the younger demographic are particularly savvy with social sharing across multiple business opportunity platforms. There can be no assurance that our initiatives will generate lasting excitement and engagement among our sales force in the long term or that planned initiatives will be successful in maintaining sales force activity and productivity or in motivating Sales Leaders to remain engaged in business building and developing new Sales Leaders. Some initiatives may have unanticipated negative impacts on our sales force, particularly changes to our sales compensation plans, incentive rewards, and recognition practices. The introduction of a new product or key initiative can also negatively impact other product lines to the extent our Sales Leaders focus their efforts on the new product or initiative. In addition, if any of our products fails to deliver on consumer or sales force expectations, we could see an increase in product returns.
Product diversion may have a negative impact on our business.
We see our products being sold through online marketplace sites and other distribution channels in certain markets. Although we continually take steps to control product diversion, this activity continues to be a challenge, and we believe that changes to our global sales compensation plan or increased use of online channels for conducting sales transactions have and may continue to lead to increased product diversion. Product diversion causes confusion regarding our distribution channels and negatively impacts the ability of our sales force to sell our products. It also creates a negative impression regarding the viability of the business opportunity for our sales force, which can harm our ability to recruit new people to join our sales force. Product diversion may also cause brand erosion and negatively impact the brand value perception. Product diversion schemes may also involve illegal importation, investment or other activities and harm our brand if gray market or counterfeit goods are passed off as our own. If we are unable to effectively address this issue or if diversion increases, our business could be harmed.
Risks Associated with COVID-19
Epidemics, including COVID-19, and other crises have and may continue to negatively impact our business.
Due to the person-to-person nature of direct selling, our results of operations have been, and will likely continue to be, harmed if the fear of a communicable and rapidly spreading disease or other crises such as natural disasters result in travel restrictions or cause people to avoid group meetings or gatherings or interaction with other people. It is difficult to predict the impact on our business, if any, of the emergence of new epidemics or other crises. The outbreak of COVID-19 in 2020 and ensuing pandemic resulted in significant contraction of economies around the world and interrupted global supply chains as many governments issued stay-at-home orders to combat COVID-19. Government-imposed restrictions and public hesitance regarding in-person gatherings, travel and visiting public places have reduced our sales force’s ability to hold sales meetings, resulted in cancellations of key sales leader events and incentive trips, and required us to temporarily close our walk-in and fulfillment locations in some markets where we have such properties. The outbreak has also impacted our ability to obtain some ingredients and packaging as well as ship products in some markets. Our supply chain and logistics have incurred some interruptions and cost impacts, and we could experience more significant interruptions and cost impacts or face more significant closures in the future, whether due to COVID-19 directly, workforce (including the workforce of our supply chain) resistance to vaccination requirements, or other related factors. These factors and other events related to COVID-19 have negatively impacted our sales and operations and will likely continue to negatively affect our business and our financial results. Although some of the negative impacts of COVID-19 have recently improved, this situation continues to be fluid and there is uncertainty regarding its duration and future impacts. For example, COVID-19 variants have caused some of the pandemic’s negative impacts to worsen or return, and COVID-related factors continue to impact our business in Mainland China. In addition, the productivity of our sales force has been, and could continue to be, negatively impacted as restrictions are lifted and our sales force is able to more freely travel and take vacations.
In addition, regulatory authorities closely scrutinize the product- and earnings-related claims made by direct-selling companies and their sales force, including claims related to the COVID-19 pandemic. For example, during 2020 to 2022, the FTC issued letters that warned several direct-selling companies to remove and address claims that they or members of their sales force were making about their products’ ability to treat or prevent COVID-19 and/or about the earnings that people who have lost income could make. Although we take steps to educate our sales force on proper claims, if members of our sales force make improper claims, or if regulators determine we are making any improper claims, it could lead to an FTC investigation and could harm our business and reputation.
International Risks
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to risks associated with our international operations, including:
| ● | the possibility that a government might ban or severely restrict our sales compensation and business models; |
| ● | the possibility that local civil unrest, political instability, or changes in diplomatic or trade relationships might disrupt our supply chain or other operations in one or more markets—for example, the ongoing conflict in Russia and Ukraine has caused distraction to our sales force; |
| ● | the lack of well-established or reliable legal systems in certain areas where we operate; |
| ● | the presence of high inflation in the economies of international markets in which we operate; |
| ● | the possibility that a government authority might impose legal, tax, customs, or other financial burdens on us or our sales force, due, for example, to the structure of our operations in various markets; |
| ● | the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and |
| ● | the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash. |
There has been an increasing level of tension in U.S.-China relations over the last several years. Given the significant size of our China business, our business could be harmed if relations continue to deteriorate or additional sanctions or restrictions are imposed by either government. In addition, there have been adverse public reaction and media attention to statements made by representatives of other businesses related to these issues that have adversely affected business. We could similarly face adverse public or media attention, and potentially increased regulatory scrutiny, as a result of increased trade or political tensions or any statements or actions by employees or our sales force that generate publicity with respect to these issues.
We are subject to financial risks as a result of our international operations, including exposure to foreign-currency fluctuations, currency controls and inflation in foreign markets, all of which could impact our financial position and results of operations.
In 2022, approximately 76% of our sales occurred in markets outside of the United States in each market’s respective local currency. Foreign-currency fluctuations affect our financial position and results of operations. We purchase inventory primarily in the United States in U.S. dollars. In preparing our financial statements, we translate revenue and expenses in our markets outside the United States from their local currencies into U.S. dollars using weighted-average exchange rates. If the U.S. dollar strengthens relative to local currencies, our reported revenue, gross profit and net income will likely be reduced. Foreign-currency fluctuations also cause losses and gains resulting from translation of foreign-currency-denominated balances on our balance sheet.
We also face the risk of currency controls. If foreign governments restrict transfers of cash out of their country and control exchange rates, we may be limited as to the timing and amount of cash we can repatriate and may not be able to repatriate cash at beneficial exchange rates, which could have a material adverse effect on our financial position, results of operations or cash flows. We typically fund the cash requirements of our operations in the United States through intercompany dividends, intercompany loans and intercompany charges for products, use of intangible property, and corporate services. However, some markets impose government-approval or other requirements for the repatriation of dividends. For example, in recent years,Mainland China, we are unable to repatriate cash from current operations in the FDAform of dividends until we file the necessary statutory financial statements for the relevant period. We also have experienced delays in repatriating cash from Argentina. As of December 31, 2022, we had $33.4 million in cash denominated in Chinese RMB, and our intercompany receivable with our Argentina subsidiary was $14.9 million.
In addition, high levels of inflation and currency devaluations in any of our markets could negatively impact our balance sheet and results of operations. Gains and losses resulting from the remeasurement of non-U.S. dollar monetary assets and liabilities of our subsidiaries operating in highly inflationary economies are recorded in our net earnings. For example, during 2018, Argentina was designated as a highly inflationary economy under U.S. generally accepted accounting principles; accordingly, beginning with the third quarter of 2018, we began to apply highly inflationary accounting for our Argentina operations, which has issued warning lettersresulted in additional foreign-currency charges. Other markets may be designated as highly inflationary economies in the future, which could result in further foreign-currency charges.
Although we may engage in transactions intended to reduce our exposure to foreign-currency fluctuations, there can be no assurance that these transactions will be effective. Complex global political and economic dynamics can affect exchange rate fluctuations. For example, the implementation of tariffs, border taxes or other measures related to the level of trade between the United States and other markets could impact the value of the U.S. dollar. It is difficult to predict future fluctuations and the effect these fluctuations may have upon future reported results or our overall financial condition.
Potential changes to tariff and import/export regulations, and ongoing trade disputes between the United States and other jurisdictions may have a negative effect on global economic conditions and our business, financial results and financial condition.
The United States and other foreign jurisdictions may change customs regulations or tariff rates that are applied to our imports or exports at any time. Tariff changes are difficult to predict and may cause us material short-term or long-term cost fluctuations. We rely on the use of Free Trade Agreements, where available, that may experience alterations, suspensions or cancellations, which could increase our customs expense or otherwise harm our business. In addition to tariffs, any actions taken by the United States or by foreign countries to further implement trade policy changes, including limiting foreign investment or trade, increasing regulatory scrutiny, or other actions that impact our ability to obtain necessary licenses or approvals could negatively impact our business. These actions are unpredictable, and any of them could also have a material adverse effect on global economic conditions and the stability of global financial markets, significantly reduce global trade, restrict our access to suppliers or customers, and have a material adverse effect on our business, financial condition and results of operations.
Human Capital Risks
If we are unable to retain our existing sales force and recruit additional people to join our sales force, our revenue may not increase and may even decline.
Our products are primarily marketed by our sales force, and we depend on them to generate virtually all of our revenue. Our sales force may terminate their services at any time, and like most direct selling companies, we experience high turnover among our sales force from year to year. People who join our company to purchase our products for personal consumption or for short-term income goals frequently only stay with us for a short time or are less consistent in their participation. Sales Leaders who have committed time and effort to build a sales organization will generally stay for longer periods. To increase our revenue, we must increase the number of and/or the productivity of our sales force. We must also expand our outreach and outbound efforts to attract, connect and nurture new customers for a wider consumer base who purchase products and whom we can foster along a consumer journey to promote retention and higher lifetime value.
We have experienced periodic fluctuations in Sales Leaders, Paid Affiliates and Customers in the past and could experience such fluctuations again in the future. For example, our Sales Leaders in Mainland China declined 46% from December 31, 2018 to December 31, 2019 due to such factors as meeting restrictions and negative media scrutiny, and also declined 32% from December 31, 2021 to December 31, 2022 due to pressures from COVID-related factors. If our business, products and initiatives do not drive growth and/our productivity in Sales Leaders, Paid Affiliates and Customers, our operating results could be further harmed.
The number and productivity of our sales force is negatively impacted by several additional factors, including:
| ● | any adverse publicity or negative public perception regarding us, our products or ingredients, our distribution channel, or our industry or competitors; |
| ● | lack of interest in, dissatisfaction with, or the technical failure of, our products or digital tools; |
| ● | lack of compelling products or income opportunities, including through our sales compensation plans and incentive trips and other offerings; |
| ● | negative sales force reaction to changes in our sales compensation plans or to our failure to make changes that would be necessary to keep our compensation competitive with the market; |
| ● | interactions with our company, including our actions to enforce our policies and procedures and the quality of our customer service; |
| ● | any regulatory actions or charges against us or others in our industry, as well as regulatory changes that impact product formulations and sales viability; |
| ● | general economic, business, public health and geopolitical conditions, including employment levels, employment trends such as the gig and sharing economies, pandemics or other conditions that curtail person-to-person interactions, and the ongoing conflict in Russia and Ukraine which has caused distraction to our sales force; |
| ● | changes in the policies of social media platforms used to prospect or recruit potential consumers and sales force participants; |
| ● | recruiting efforts of our competitors and changes in consumer-loyalty trends; |
| ● | potential saturation or maturity levels in a given market, which could negatively impact our ability to attract and retain our sales force in such market; |
| ● | growing gig economy competition which may draw away potential product sellers, affiliates, and influencers; |
| ● | our sales force’s increased use of social sharing channels, which may enable them to more easily engage their consumers and sales network in other opportunities; |
| ● | lack of sufficient tools to create customer interest in our products and to manage and build a personalized business; and |
| ● | our and our sales force’s ability to implement social commerce and other selling platforms that appeal to consumers. |
We depend on our key personnel and Sales Leaders, and the loss of the services provided by any of our executive officers, other key employees or key Sales Leaders could harm our business and results of operations.
Our success depends to a significant degree upon the continued contributions of our senior and regional management, many cosmeticof whom would be difficult to replace. Our senior and regional management employees may voluntarily terminate their employment with us at any time, and it is not uncommon for employees of direct-selling companies, alleging improper structure/function claims regardingincluding employees of our company, to terminate their cosmeticemployment and begin working for another direct-selling company. In addition, we need to continue to attract and develop qualified management personnel to sustain growth in our markets. Attracting and retaining qualified personnel has been an increased challenge during the current competitive employment environment. If we are not able to successfully retain existing personnel and identify, hire and integrate new personnel, our business and growth prospects could be harmed.
The success of our business also depends on our key Sales Leaders. For the three months ended December 31, 2022, we had approximately 48,737 Sales Leaders. As of December 31, 2022, approximately 356 Sales Leaders occupied the highest levels under our global sales compensation plan, and in Mainland China approximately 103 key Sales Leaders were playing a significant role in managing, training and servicing our sales force in that market and driving sales. We rely on these Sales Leaders (or other sales force members that they train, collaborate with, support and service) for a substantial majority of our revenue. As a result, the loss of a high-level or key Sales Leader or a group of leading Sales Leaders, whether by their own choice or through disciplinary actions by us for violations of our policies and procedures, could negatively impact our growth and our revenue.
Risks Associated with Our Manufacturing and Operations
Production difficulties, quality control problems, inaccurate forecasting, shortages in ingredients, and reliance on our suppliers could harm our business.
Production difficulties, quality control problems, inaccurate forecasting and our reliance on third-party suppliers to manufacture and deliver products that meet our specifications in a timely manner could harm our business. Occasionally, we have experienced production difficulties with respect to our products, including the availability of labor, raw materials, components, packaging and products that do not meet our specifications and quality control standards. These production difficulties and quality problems have in the past, and could in the future, result in stock outages or shortages in our markets with respect to such products, harm our sales, or create inventory write-downs for unusable products.
In addition, we and manufacturers in our supply chain acquire ingredients, components, products and packaging from third-party suppliers and manufacturers. A loss of any of these suppliers and any difficulties in finding or transitioning to alternative suppliers could harm our business. In addition, we obtain our ageLOC Galvanic Facial Spa, ageLOC Body Spa, and Nu Skin Facial Spa devices and some other products and ingredients from sole suppliers that own or control the product formulations, ingredients or other intellectual property rights associated with such products. We also license the right to distribute some of our products from third parties. In the event we are unable to maintain or renew our contracts with any of these suppliers, manufacturers or other third parties, we may need to discontinue some products or develop substitute products, which could harm our revenue. In addition, if we experience supply shortages, price increases or regulatory impediments with respect to the raw materials, ingredients, components or packaging we use for our products, we may need to seek alternative supplies or suppliers and may experience difficulties in finding replacements that are comparable in quality and price. For example, product claims regarding gene activity, cellular rejuvenation,some of our products, including ageLOC Meta and rebuilding collagen. There isageLOC Youth (Youthspan or Y-Span in some markets), incorporate unique natural ingredients that are only harvested once per year and/or may have limited global supplies. If demand exceeds forecasts, we may have difficulties in obtaining additional supplies to meet the excess demand until the next growing season. If we are unable to successfully respond to such issues, our business could be harmed.
The loss of or a degree of subjectivitydisruption in determining whetherour manufacturing, supply chain and distribution operations, or significant expenses or violations incurred by such operations, could adversely affect our business.
As a claim is an improper structure/function claim. Given this subjectivitycompany engaged in manufacturing, distribution, and our research and development focus on a global scale, we are subject to the sourcesrisks inherent in such activities, including industrial accidents, climate or environmental events, fires, floods, earthquakes, labor shortages, strikes and other labor or industrial disputes, disruptions in logistics or information systems, loss or impairment of agingkey manufacturing or distribution sites, import and export restrictions or delays, product quality control, safety, licensing requirements and other regulatory or government issues, as well as natural disasters, pandemics, border disputes, global uncertainties, acts of terrorism and other external or macroeconomic factors over which we have no control. For example, the influencelong-term impacts of climate change, whether involving physical risks (such as extreme weather conditions, drought, or rising sea levels) or transition risks (such as regulatory or technology changes) may be widespread and unpredictable. Certain impacts of physical risk may include temperature changes that increase the heating and cooling costs at our facilities; extreme weather patterns that affect the production or sourcing of certain ingredients on gene expression, there is a riskcomponents; flooding and storms that damage or destroy our buildings and inventory; and heat and extreme weather events that cause long-term disruption or threats to the habitability of our customers’ communities. These risks may be heightened if we could receive a warning letter, be requiredconsolidate certain of our manufacturing, distribution or supply facilities or if we are unable to modifysuccessfully enhance our product claimsdisaster recovery planning. These risks also increase as we pursue our current strategy of acquiring manufacturing companies and thereby conducting more of our manufacturing in-house. The loss of, or take other actionsdisruption or damage to, satisfy the FDA if the FDA determines any of our marketing materials includefacilities or centers or those of our third-party manufacturers could have a material adverse effect on our business, reputation, results of operations and financial condition.
We have experienced, and may continue to experience, disruptions to the transportation channels used in our supply chain and distribution operations, including increased airport and shipping port congestion, a lack of transportation capacity, increased fuel expenses, import or export controls or delays, and labor disputes or shortages. Disruptions in our container shipments may result in increased costs, including the additional use of air freight to meet demand. Congestion to ports can affect previously negotiated contracts with shipping companies, resulting in unexpected increases in shipping costs and reduction in our profitability. For example, the COVID-19 pandemic has continued to result in several disruptions and delays, as well as quantity limits and price increases, in our global transportation channels.
In addition, our manufacturing facilities are subject to numerous regulations, including labor regulations and environmental regulations that govern the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals and other materials. We will also likely become subject to new regulations in these areas, which could require substantial expenditures. Violations of existing or new requirements could result in financial penalties and other enforcement actions and could require us to halt one or more portions of our operations until a violation is cured. The costs of curing incidents of non-compliance, resolving enforcement actions or private-party actions that might be initiated against us, or of satisfying new legal requirements could have a material adverse effect on our business, financial condition, or results of operations.
Our business could be negatively impacted if we fail to execute our product launch process or ongoing product sales due to difficulty in forecasting or increased pressure on our supply chain, information systems and management.
Prior to making a product generally available for purchase in a market, we often do one or more introductory offerings of the product, such as a preview of the product to our Sales Leaders or other product introduction or promotion. These offerings sometimes generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue during the quarter and skew year-over-year and sequential comparisons. These offerings may also increase our product return rate. We have, and may in the future, experienced difficulty effectively managing growth associated with these offerings and may face increased risk of improper structure/function claimssales force activities and related government scrutiny.
In addition, the size and condensed schedule of these product offerings increase pressure on our supply chain and order processing systems. We have, and may in the future, failed to appropriately scale our system capacity and operations in response to unanticipated changes in demand for our cosmetic products.existing products or to the demand for new products, which reduces our sales force’s confidence in our business and could harm our reputation and profitability.
As our sales force increases its use of social platforms to interact with customers, our business results could be adversely affected if our implementation of new platforms and processes to support our sales force is delayed. In addition, plaintiffs’ lawyerswe are dependent on third parties for testing and delivery of portions of these and other of our information system platforms. Unanticipated changes or system failures by third parties could harm our ability to meet the expectations of our sales force, thus resulting in harm to our revenue, reputation and sales force confidence in our systems.
If we do not accurately forecast sales levels in each market for product launches or ongoing product sales, obtain sufficient ingredients, components or packaging, or produce a sufficient supply to meet demand, we may incur higher expedited shipping costs and we may temporarily run out of stock of certain products, which could negatively impact the enthusiasm of our sales force and consumers. Conversely, if demand does not meet our expectations for a product launch or ongoing product sales or if we change our planned launch strategies or initiatives, we could incur inventory write-downs. Each of these issues has impacted us in the past, and they could again occur with our ongoing product launches. If we fail to effectively forecast product demand in the product launch process or for ongoing product sales, our reputation and profitability could be negatively impacted.
If we are unable to effectively manage our growth in certain markets, our operations could be harmed.
At times, we can experience significant growth in one or more of our markets. For example, during 2020 we experienced significant growth in some of the markets in our Americas and EMEA segments. Growth can strain our ability to effectively manage our operations, as it requires us to expand our management team, labor force, technology bandwidth and capabilities, and manufacturing operations. Insufficient management execution to support growth could result in, among other things, product delays or shortages, decreases in product quality, service level challenges, operating mistakes and errors, inadequate customer service, inappropriate claims or promotions by our sales force, and governmental inquires and investigations, all of which could harm our revenue and ability to generate sustained growth and result in unanticipated expenses. In addition, we need to continue to attract and develop qualified management personnel to sustain growth. If we are not able to successfully retain existing personnel and identify, hire and integrate new personnel, our business and growth prospects could be harmed.
System failures, capacity constraints and other information technology difficulties could harm our business.
With global operations and a complex sales compensation plan, our business is highly dependent on efficiently functioning information technology systems, including websites, mobile applications, third-party cloud providers, data centers, databases, networks and other systems. We rely on these systems for accepting and processing sales orders, operating our sales force and customer support operations, tracking and compensating our sales force, conducting our corporate and regional operations, preparing our financial statements, and other aspects of our business. Accordingly, the performance, reliability and availability of our systems are critical to our business, reputation, financial reporting, and ability to attract and retain our sales force and customers.
Our or our third-party providers’ systems may be damaged or disrupted by fires, floods, earthquakes or other natural disasters, human error, telecommunications failures, power loss, physical or electronic break-ins, computer viruses, cyber attacks, changes in our information technology systems or organization, and other events. We have, filed class action lawsuits againstand may in the future, experienced system failures and outages. We cannot guarantee that the preventive measures we take, including redundancies, security protocols, network protection mechanisms and other procedures, will be adequate to prevent or remedy system failure or interruption, data loss, security breaches or other data security incidents. Furthermore, any mitigation process could take several days or more, thus resulting in a loss of revenue, loss of confidence of our sales force and harm to our reputation.
In addition, we make significant expenditures on our information technology infrastructure and other technology initiatives, and these items could become obsolete or impaired, which has and may in the future cause us to incur significant expenses to address. For example, in 2018, following an evaluation of our information technology infrastructure and organization and our social sharing and digital initiatives, we determined to alter our strategic direction with respect to some of our competitors aftersystems and tools, resulting in impairment charges of approximately $49 million. We also incurred approximately $22 million in severance payments and other expenses related to the reorganization of our competitors receivedInformation Technology Department and other corporate and regional offices. Additional cash outlay and new personnel were also necessary for execution of new plans and strategy. In this strategic shift in direction, we continue to identify and re-architect additional legacy systems to help mitigate the risk and exposure these FDA warning letters.systems introduce to our business. We also continue to allocate resources to new technology and digital initiatives. There can be no assurance that we will not be subjectable to government actionsbuild and roll-out our new technology and digital tools on a global scale or class action lawsuits, whichthat they will function as intended, and these initiatives may entail significant expenses and could harmcause disruptions in our business.
Any acquired companies or future acquisitions may expose us to additional risks.
We have acquired certain businesses, and they generally do not allow marketing using atypical results. Our sales force has historically used testimonials and “before and after” photos to market and sell some of our popular products such as our ageLOC Spa systemsand ageLOC Transformation anti-aging skin care system. We intendwe plan to continue to use testimonialsdo so in the future as we encounter acquisition prospects that would complement our current product offerings, increase the size and geographic scope of our operations or otherwise offer growth and operating efficiency opportunities. At any particular time, we may be in various stages of assessment, discussion and/or negotiation with regard to one or more potential acquisitions or investments, not all of which will be consummated. Acquisitions involve numerous risks and uncertainties and may be of businesses in which we lack operational or market experience. The financing for any of these acquisitions could dilute the interests of our popularstockholders, result in an increase in our indebtedness or both. Our past acquisitions have, and future acquisitions could, entailed numerous risks, including:
| ● | difficulties in integrating acquired operations or products; |
| ● | the difficulties of imposing financial and operating controls on the acquired companies and their management and the potential costs of doing so; |
| ● | the potential loss of key employees, customers, suppliers or distributors from acquired businesses and disruption to our direct selling channel; |
| ● | diversion of management’s attention from our core business; |
| ● | the failure to achieve the strategic objectives of these acquisitions; |
| ● | increased fixed costs; |
| ● | the failure of the acquired businesses to achieve the results we have projected in either the near or long term; |
| ● | the assumption of unexpected liabilities, including litigation risks; |
| ● | adverse effects on existing business relationships with our suppliers, sales force or consumers; and |
| ● | risks associated with entering markets or industries in which we have limited or no prior experience, including limited expertise in running the business, developing the technology, and selling and servicing the products. |
Our failure to successfully complete the integration of any acquired business, or a failure to adjust our fixed costs quickly enough or sufficiently to adapt to rapidly changing market conditions, could have a material adverse effect on our business, financial condition and operating results. In addition, there can be no assurance that we will be able to identify suitable acquisition candidates, consummate acquisitions on favorable terms or realize the anticipated benefits of an acquisition. It is also possible that our acquired companies could sell products including weight management products and other personal care products. In highly regulated and scrutinized product categories such as weight management, if we or utilize a business model similar to that of our sales force fails to comply with the Guides or makes improper product claims, the FTC could bring an enforcement action against us and weNu Skin business, which could be fined and/or forced to alterviewed negatively by our marketing materials.sales force and result in a reduction in our revenue.
Product Legal and Regulatory Risks
Regulations governing our products, including the formulation, registration, or pre-approval, marketing and sale of our products, could harm our business.
Our products are subject to extensive government regulation by numerous domesticfederal, state and foreignlocal government agencies’agencies and authorities’ laws and extensive regulations governing the ingredients and products that may be marketed without pre-market approval and/or registration.authorities. Many of these laws and regulations involve a high level of subjectivity, are inherently fact-based and subject to interpretation, and vary significantly from market to market. These laws and regulations can, also limit the claims we can make regarding our products and often restrict our ability to introduce products or ingredients into one or more markets.
| ● | delays, or altogether prohibitions, in introducing or selling a product or ingredient in one or more markets; |
| ● | delays and expenses associated with the registration and approval process for a product; |
| ● | limitations on our ability to import products into a market; |
| ● | delays and expenses associated with compliance, such as record keeping, documentation of the properties of certain products, labeling, and scientific substantiation; |
| ● | limitations on the claims we can make regarding our products; and |
| ● | product reformulations, or the recall or discontinuation of certain products that cannot be reformulated to comply with new regulations. |
We have observed a general increase in regulatory activity and activism in the United States and across many markets globally where we operate, and the regulatory landscape is becoming more complex with increasingly strict requirements. In particular, the requirements are impacting the ingredients we can include in our products, the accepted quantities of those ingredients, and the quality and characterization of the ingredients. Global regulators have in recent years become overall more restrictive on the accepted levels of active ingredients that we can use in our product, in some cases banning them outright. They have also become more restrictive on permitted contaminant levels in ingredients and, in many cases, have forced complete removal of such contaminants. In certain cases, such as regarding some pesticides which are virtually ubiquitous in nature, it has proven difficult to comply with the requirements. Further, many of the restrictions regarding ingredient quality are not directly applicable to our products, leaving the possibility that our interpretation of compliance may not match that of the enforcing authorities. Often there is a lack of an equivalent active ingredient present in the marketplace. In other cases, the removal or reduction of a technical ingredient, such as various types of parabens, leads to a significant change to the character of the product that may make it no longer desirable or safe to the consumer. If this trend in new regulations continues, we may find it necessary to alter some of the ways we have traditionally marketed our products in order to stay in compliance with a changing regulatory landscape and this could add to the costs of our operations and/or have an adverse impact on our business.
Many laws and regulations govern the registration, pre-market approval or other aspects of regulatory oversight of our products. For example, in the United States, some legislators and industry critics have pushed for years to increase regulatory authority by the FDA over nutritional supplements. In 2011, the FDA proposed draft guidance to clarify the FDA’s interpretation of the dietary ingredient notification requirements, and in 2016, the FDA issued a revised draft guidance that superseded the 2011 version. This draft guidance is not yet final but appears to indicate that the FDA is expanding its definition of what is considered a “new dietary ingredient” in the United States. The industry has worked with the FDA for several years, providing comments to the FDA to modify this guidance. While still in flux, if enacted in final form as proposed, this guidance could impose new and significant regulatory barriers for our nutritional supplement products or unique ingredients, which could delay or inhibit our ability to formulate, introduce and sell nutritional supplements as we have in the past. Similarly, from time to time, efforts are made by some individuals or groups to repeal the Dietary Supplement Health and Education Act of 1994 (“DSHEA”), the U.S. law that provides a separate body of regulations for dietary supplements as compared to drugs. Such a repeal would result in significant burdens to our product development, and the costs of running our business would increase significantly. We face similar pressures in our other markets, which continue to set restrictions on ingredients and their acceptable maximum levels, as well as on ingredient characterization, quality and levels. In Europe, for example, we are unable to market supplements that contain ingredients that were not marketed in Europe prior to May 1997 (“novel foods”) without going through an extensive registration and pre-market approval process.
The FDA currently does not have a pre-market approval system for cosmetics. However, cosmetic products may become subject to more extensive regulation in the future. These events could interrupt the marketing and sale of our products, severely damage our brand reputation and image in the marketplace, increase the cost of our products, cause us to fail to meet customer expectations or cause us to be unable to deliver merchandise in sufficient quantities or of sufficient quality to our stores, any of which could result in lost sales.
new regulations or changes in the interpretations and enforcement of existing regulations may result in significant compliance costs or discontinuation of product sales and may impair the marketability of our products, resulting in significant loss of net sales. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business. Future changes could include requirements forIf new or existing laws and regulations restrict, inhibit or delay our ability to introduce or market our products or limit the reformulation of certainclaims we are able to make regarding our products, to meet new standards, the recall or discontinuation of certain products that cannot be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling, and additional scientific substantiation. Any or all of these requirementsthis could have a material adverse effect on our business, financial condition, and operating results. If we fail to comply with the laws and regulations governing our products, we could face enforcement action, and we could be fined or forced to alter or stop selling our products.
Government regulations and private party actions relating to the marketing and advertising of our products and services may restrict, inhibit or delay our ability to sell our products and harm our business.
Government authorities regulate advertising and product claims regarding the efficacy and benefits of our products. These regulatory authorities typically require adequate and reliable scientific substantiation to support any marketing claims. What constitutes such reliable scientific substantiation can vary widely from market to market and there is no assurance that the research and development efforts that we undertake to support our claims will be deemed adequate for any particular product or claim. If we are unable to show adequate and reliable scientific substantiation for our product claims, or if our marketing materials or the marketing materials of our sales force make claims that exceed the scope of allowed claims for dietary supplements, cosmetics or devices that we offer, the FDA or other regulatory authorities could take enforcement action requiring us to revise our marketing materials, amend our claims or stop selling certain products, which could harm our business.
For example, in recent years, the FDA has issued warning letters to many cosmetic companies alleging improper structure/function claims regarding their cosmetic products, including, for example, product claims regarding gene activity, cellular rejuvenation, and rebuilding collagen. There is a degree of subjectivity in determining whether a claim is an improper structure/function claim. Given this subjectivity and our research and development focus on the sources of aging and the influence of certain ingredients on gene expression, there is a risk that we could receive a warning letter, be required to modify our product claims or take other actions to satisfy the FDA if the FDA determines any of our marketing materials include improper structure/function claims for our cosmetic products. In addition, plaintiffs’ lawyers have filed class action lawsuits against some of our competitors after our competitors received these FDA warning letters. There can be no assurance that we will not be subject to government actions or class action lawsuits, which could harm our business.
In the United States, the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising (“Guides”) require disclosure of material connections between an endorser and the company they are endorsing, and they generally do not allow marketing using atypical results. Our sales force has historically used testimonials and “before and after” photos to market and sell some of our popular products such as our spa devicesand ageLOC Transformation anti-aging skin care system. We intend to continue to use testimonials for our popular products, including weight management products and beauty products. In highly regulated and scrutinized product categories such as weight management, if we or our sales force fails to comply with the Guides or makes improper product claims, the FTC could bring an enforcement action against us and we could be fined and/or forced to alter our marketing materials.
Our operations could be harmed if we fail to comply with Good Manufacturing Practices.
Across our markets, there are regulations on a diverse range of Good Manufacturing Practices that apply to us and to our vendors covering product categories such as dietary supplements, cosmetics, foods, over-the-counter drugs and medical devices. The Good Manufacturing Practices impose stringent requirements on a variety of topics, including vendor qualifications, ingredient identification, manufacturing controls and record keeping. Ingredient identification requirements, which often require us to confirm the levels, identity and potency of ingredients listed on our product labels within a narrow range, are particularly burdensome and difficult for us because our products contain many different ingredients. Additionally, certain Good Manufacturing Practices obligate us to track and periodically report adverse events to government agencies. Compliance with these increasing regulations may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are qualified and in compliance. In addition, our operations could be harmed if regulatory authorities determine that we or our vendors are not in compliance with these regulations or if public reporting of adverse events harms our reputation for quality and safety. A finding of noncompliance may result in administrative warnings, penalties or actions impacting our ability to continue selling certain products, including public withdrawals, seizures and recalls. For example, in prior years, we have had product recalls in the United States based on labeling issues. Problems associated with product recalls could be exacerbated due to the global nature of our business because a recall in one jurisdiction could lead to recalls in other jurisdictions. In addition, these risks associated with noncompliance could increase as we acquire businesses, including the businesses that we have already acquired in our Rhyz strategic investment arm and any businesses we may acquire in the future.
If our current or shortages in ingredients could harm our business.
While we have made to our global sales compensation plan in the past, which were successful in several markets, did not achieve anticipated results in certain other markets and negatively impacted our business. For example, in the fourth quarter of 2017, we began to implement significant changes to our global sales compensation plan, which we have now rolled out across all of our markets with the exception of Mainland China which operates under a different business model. Although we believe these changes have yielded some positive results in many of our markets to date, they have not been viewed positively by some segments ofrequired to register our sales force, and it is difficult to predict the long-term impacts of these changes.
In some cases, challenges can arise even after we have completed the required registration/clearance process or determined that a product does not need registration/clearance. This could occur if a jurisdiction changes its laws or interpretations thereof, for example. In addition, if our sales force attempts to import or export products from one market to another in violation of our policy, makes medical claims regarding our products, or uses our products to perform medical diagnoses or other activities limited to licensed professionals or approved medical devices (in markets where the product is not approved), it could negatively impact our subsidiaries are organized. Tax laws,ability to market or sell these products and subject us to legal or regulatory actions.
Because medical device regulations administrative practices and interpretationsvary widely from market to market, registration or clearance in various jurisdictionsone market does not preclude challenges or delays in obtaining registration or clearance in other markets, nor does it preclude other markets from requiring us to make additional modifications or provide additional documentation as conditions to granting clearance. Furthermore, in some cases, registration or clearance to sell a product in one market may be subject to change,used as precedent for requiring similar approval for the product in another market, or for similar products in the same market. These additional requirements could increase the cost associated with or without notice, due to economic, politicalmanufacturing and other conditions. As a result, significant judgment is requiredselling these products as non-medical devices in evaluating and estimating our provision for income taxes. Our future effective tax rates could be affected by numerous factors, such as intercompany transactions, changes in our business operations, acquisitions and dispositions, entry into new markets, the amount of our foreign earnings and where earned, losses incurred in jurisdictions, the inability to realize tax benefits, changes in foreign currency exchange rates, changes in our stock price, uncertain tax positions, allocation and apportionment of state taxes, changes in our deferred tax assets and liabilities and their valuation. In addition, a number of countries are pursuing changes to their tax laws applicable to corporate multinationals, as the U.S. did with its tax reform legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). Foreign governments may enact tax laws in response to the Tax Reform Act that could result in further changes to global taxation and may materially affect our operating results and financial condition.markets.
We may incur product liability claims that could harm our business.
We sell a variety of different products for human consumption and use, including cosmetics, dietary supplements, conventional foods, OTC drugs and devices. Our cosmetics dietary supplements and conventional foods, as well as some of our dietary supplements, are not generally subject to pre-market approval or registration processes so we cannot rely upon a government safety panel to qualify or approve our products for use, and some ingredients may not have long histories of human consumption or use. We rely upon published and unpublished safety information including clinical studies on ingredients used in our products and conduct our own clinical and safety studies on some key ingredients and products, but not all products. A product may be safe for the general population when consumed or used as directed but could cause an adverse reaction for some individuals, such as a person who has a health condition or allergies or who is taking a prescription medication. While we include what we believe are adequate instructions and warnings and we have historically had low numbers of reported reactions, previously unknown adverse reactions could occur. If we discover that our products are causing adverse reactions, or if we determine that any of our employees have not properly handled reports of adverse reactions, we could suffer further adverse publicity or government sanctions.
As a result of the type of products that we sell, we may be subject to various product liability claims, including that the products fail to meet quality or manufacturing specifications, contain contaminants, include inadequate instructions as to their proper use, include inadequate warnings concerning side effects and interactions with other substances or for persons with health conditions or allergies, or cause adverse reactions or side effects. Consumer protection laws and regulations governing our business continue to expand, and in some states such as California, class-action lawsuits based on increasingly novel theories of liability are expanding. Product liability claims could increase our costs, cause negative publicity, and adversely affect our business and financial results. As we continue to offer an increasing number of new products through larger scale, limited-time offerslarge product offerings our product liability risk may increase.
If our sales force or employees provide improper or inappropriate advice regarding our products theiror our products’ use or safety, we may be subject to additional product liability.
We have generally elected to self-insure our product liability risks. We continue to periodically evaluate whether we can and should obtain product liability insurance. Based upon our current approach to product liability risk management, if any of our products are found to cause any injury or damage or we become subject to product liability claims, we will be subject to the full amount of liability associated with any injuries or damages. This liability could be substantial and may exceed our existing reserves and harm our business.
Legal, Regulatory and Compliance Risks
We may become involved in legal proceedings and other matters that could adversely affect our operations or financial results.
We have been, and regularly are, a party to litigation, government inquiries or investigations, audits or other legal matters. These legal proceedings may include, among other things, claims alleging violation of the federal securities laws or state corporate laws, or claims related to employment matters, intellectual property, fair-competition/anti-trust laws, our products, business opportunity or advertising, or other matters. Claims may be brought by a regulator, investor, member of our sales force, consumer, employee or other private parties and in some cases may be brought as class action lawsuits.
Our increased activity during the past several years with acquisitions, divestments and other investment-related activities introduces an additional area of litigation risk, and we have had litigation and threats of litigation related to these matters. Other parties in the transactions or potential transactions, or other parties involved in the businesses themselves, could bring claims against us. For example, from 2019 until January 2023, we were in litigation with a dairy farmer who claimed he was a general partner in our former indoor-growing business and related businesses. He also sought damages exceeding $250 million. Although we ultimately reached a settlement agreement with him in January 2023, there can be no assurance that the resolution of future cases will be favorable to us.
In general, litigation claims, regulatory actions or other legal matters are expensive and time consuming and can result in settlements, adverse rulings or damages that could significantly affect financial results and the conduct of our business. It is not possible to predict the final resolution of any legal proceeding to which we may become party, and the impact of these matters on our business, results of operations and financial condition could be material.
Non-compliance with anti-corruption laws could harm our business.
Our international operations are subject to various anti-corruption laws, including principally the U.S. Foreign Corrupt Practices Act (the “FCPA”). The FCPA and the anti-corruption laws of other jurisdictions where we operate generally prohibit companies and their agents or intermediaries from making improper payments for the purpose of obtaining or retaining business, and they require companies to maintain accurate books and records and internal accounting controls. We dedicate time and resources to internal investigations of any allegation that we are not or may not be in compliance with anti-corruption laws. Such allegations, even if untrue, may result in a government investigation by a foreign or U.S. regulator, including the U.S. Department of Justice and the Securities and Exchange Commission (“SEC”). Our corporate policies require all employees to comply with the FCPA and other applicable anti-corruption laws, including the FCPA’s books-and-records and internal-accounting-controls requirements. Any regulatory determination, however, that our operations or activities are not in compliance with existing anti-corruption laws or regulations could result in the imposition of substantial fines and other penalties from U.S. or other regulatory entities.
In 2016, we reached a resolution with the SEC to pay $765,688 to settle the SEC’s allegations that our books and records and internal controls related to a charitable contribution in Mainland China in 2013 were insufficient. In agreeing to this settlement, we neither admitted nor denied the SEC’s findings. Although we have implemented additional anti-corruption policies, controls and training globally to prevent similar situations from arising in the future, we cannot be certain that these efforts will be effective or prevent future fines or penalties under the FCPA or other anti-corruption laws. Our competitors operating in Mainland China have also faced allegations from U.S. regulators and been fined accordingly in some circumstances. For example, in 2020, one of our competitors entered into a large settlement with U.S. regulators related to allegations that its employees violated the FCPA in Mainland China.
Additionally, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing or new laws might be administered or interpreted. Alleged or actual violations of any such existing or future laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others) may result in criminal or civil sanctions or reputational harm, which could have a material adverse effect on our business, financial condition and results of operations.
A failure of our internal controls over financial reporting or our regulatory compliance efforts could harm our stock price and our financial and operating results or could result in fines or penalties.
We have implemented internal controls to help ensure the completeness and accuracy of our financial reporting and to detect and prevent fraudulent actions within our financial and accounting processes. We have also implemented compliance policies and programs to help ensure that our employees and sales force comply with applicable laws and regulations. Our internal audit team regularly audits our internal controls and various aspects of our business and compliance program, and we regularly assess the effectiveness of our internal controls. There can be no assurance, however, that our internal or external assessments and audits will identify all fraud, misstatements in our financial reporting, and significant deficiencies or material weaknesses in our internal controls. Material weaknesses have in the past, and may in the future, resulted in a material misstatement of our financial results, requiring us to restate our financial statements.
From time to time, we initiate further investigations into our business operations to further bolster our regulatory compliance efforts or based on the results of our internal and external audits or on complaints, questions or allegations made by employees or other parties regarding our business practices and operations. In addition, our business and operations may be investigated by applicable government authorities. In the event any of these investigations identify material violations of applicable laws by our employees, sales force or affiliates, we could be subject to adverse publicity, fines, penalties or loss of licenses or permits.
Risks Associated with Taxes, Customs and Debt
We are subject to changes in tax and customs laws, changes in our tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities, which could have a material and adverse impact on our effective tax rate, operating results, cash flows and financial condition.
As a U.S. company doing business globally, we are subject to applicable tax and customs laws, including those relating to intercompany pricing regulations and transactions between our corporate entities in the jurisdictions in which we do business, as well as customs valuation and classification, income taxes, value-added taxes, withholding taxes, payroll taxes, and other applicable taxes. Tax and customs laws, regulations, administrative practices and interpretations in each jurisdiction are subject to change, with or without notice, due to economic, political or other conditions. For example, the United States recently enacted the Inflation Reduction Act, which imposes a 1% excise tax on stock repurchases, subject to certain adjustments or exceptions that might not apply to some of our stock repurchases. Changes in the law or in authorities’ interpretation of the law can materially increase our tax or customs expense and our effective tax rate.
Due to the numerous jurisdictions in which our subsidiaries are organized and changes in laws and their interpretations, significant judgment is required in evaluating and estimating our provision for income taxes. Our future effective tax rates could be affected by numerous factors, such as intercompany transactions, changes in our business operations, acquisitions and dispositions, entry into new markets, the amount of our earnings and where earned, losses incurred, the inability to realize tax benefits, changes in foreign currency exchange rates, changes in our stock price, uncertain tax positions, allocation and apportionment of state taxes, changes in our deferred tax assets and liabilities and changes in their valuation. In addition, U.S. and foreign governments may enact tax laws or enter into tax treaties that could result in further changes to global taxation and may materially affect our operating results and financial condition.
Government authorities may question our tax or customs positions or change their laws in a manner that could increase our effective tax rate or otherwise harm our business.
Despite our best efforts to be aware of and comply with tax and customs laws, including changes to and interpretations thereof, local authorities can and sometimes do question our tax and customs positions. We are regularly subject to tax and customs audits, investigations, inquiries or other tax controversies by tax and customs authorities around the world regarding income taxes, customs valuation and classification, transfer pricing, value-added taxes, withholding taxes, payroll taxes, and other applicable taxes. The ultimate resolution of these matters can take several years, and the outcome is uncertain and can include additional taxes/customs duties, the payment of back taxes/customs duties, interest and penalties. We reserve in our consolidated financial statements amounts that we believe are in accordance with U.S. GAAP, and we regularly assess the likelihood of an adverse outcome in these matters to determine the adequacy of our accruals and adjust them as appropriate. However, developments in these matters could warrant an additional accrual and expense, and the ultimate outcome could be materially different from our accruals, which could materially impact our effective tax rate or our overall tax or customs expense.
A decline in our business could adversely affect our financial position and liquidity.
Any significant decline in our operating results could adversely affect our financial position and liquidity. Under the terms of our credit facility, we are required to maintain certain interest coverage and leverage ratios. In addition, our outstanding borrowings under our credit facility and related term loan impose debt service and amortization requirements. A significant deterioration in our results of operations, whether as a result of prevailing economic, financial and industry conditions, COVID-19, or other causes, could impact our ability to comply with our financial covenants and debt service and amortization obligations, which could result in an event of default under the terms of our credit facility. An event of default under our credit facility could result in an inability to access funding under the agreement and cause all outstanding amounts to become immediately due and payable, which would have a material adverse effect on our financial condition and liquidity.
37
Intellectual Property Risks
In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In particular, there has been an increase in the filing of suits alleging infringement of intellectual property rights, which pressure defendants into entering into settlement arrangements quickly to dispose of such suits, regardless of their merit. Other companies or individuals may allege that we, or our sales force, consumers, licensees or other parties indemnified by us, infringe on their intellectual property rights. Even if we believe that such claims are without merit, defending such intellectual property litigation can be costly, distract management’s attention and resources, and the outcome is inherently uncertain. Claims of intellectual property infringement also might require us to redesign affected products, enter into costly settlement or license agreements, pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain of our products. Any of these results may adversely affect our financial condition.
We employ individuals who were previously employed at other beauty or wellness product companies, including our competitors or potential competitors. To the extent that our employees are involved in research areas that are similar to those in which they were involved with their former employers, we may be subject to claims that such employees have inadvertently or otherwise used or disclosed the alleged trade secrets or other proprietary information of the former employers. Litigation may be necessary to defend against such claims.
If we are unable to protect our intellectual property rights or our proprietary information and know-how, our ability to compete could be negatively impacted.impacted and the value of our products could be adversely affected.
The market for our products depends to a significant extent upon the value associated with our product innovations and our brand equity. We rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other markets, and non-disclosure, confidentiality and other types of agreements with our employees, sales force, consumers,customers, suppliers and other parties, to establish, maintain and enforce our intellectual property rights. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property rights may not be sufficient to permit us to provide competitive advantages, which could result in costly product redesign efforts, discontinuance of certain product offerings or other competitive harm. In addition, the laws of certain foreign markets where we have significant business, including markets such as Mainland China, do not protect our intellectual property rights to the same extent as the laws of the United States.
The costs required to protect our patents and trademarks may be substantial or even not practical. We have filed patent and trademark applications globally to protect our intellectual property rights in our new technologies,technologies; however, there can be no assurance that our patent and trademark applications will be approved and issue, that any patents and trademarks issued will adequately protect our intellectual property, or that such patents and trademarks will not be challenged by third parties or found by a judicial authority to be invalid or unenforceable. Moreover, many of our products rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms or at all.
From time to time, we become aware of potential violations of our intellectual property rights. For example, we are aware of some products that may infringe on our intellectual property related to the ageLOC LumiSpa device. To enforce and protect our intellectual property rights, we may initiate litigation against third parties, such as patent, copyright and trademark infringement suits or interference proceedings, and seek indemnification by contract or otherwise. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns, and we may ultimately fail to prevail or recover on any indemnification claim. Litigation also puts our patents and trademarks at risk of being invalidated or interpreted narrowly and our patent and trademark applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may adversely affect our financial condition or diminish our investments in this area.
In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees, consultants, scientific advisors and third parties. Our employees may leave to work for competitors. Our distributors or Sales Leaderssales force members may seek other opportunities. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that our current or former employees, distributors, Sales Leaders,sales force, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and adversely affect our financial condition.
Cyber security risks and the failure to maintain the integrity of company, employee, sales force or guest data could expose us to data loss, litigation, liability and harm to our reputation.
We collect, transmit and/or store and transmit large volumes of company, employee, sales force and guest data, including payment card information, personally identifiable information and other personal information, for business purposes, including for transactional and promotional purposes, and our various information technology systems enter, process, summarize and report such data. The connected devices that we have developed or are developing also collect consumer data. The integrity and protection of this data is critical to our business.
We are subject to significant security and privacy regulations, as well as requirements imposed by the payment card industry. For example, during 2018, the General Data Protection Regulation went into effect in the European Union, imposing increased data protection regulations, the violation of which could result in fines of up to 4% of our annual consolidated revenue. Many other jurisdictions have similarly enacted security and privacy regulations, including California and Mainland China, and we believe this trend will continue. In the United States, congressional committees have held preliminary hearings about the advisability of a federal data privacy law, but it is uncertain whether the federal government will adopt such a law and whether it would preempt state data privacy laws. The prospect of new data privacy laws and ambiguity regarding the interpretation of existing laws has resulted in significant uncertainty and compliance costs. In addition to laws specifically governing privacy and data security, in some cases, federal and state regulators and state attorneys general and administrative agencies have interpreted more general consumer protection laws to impose standards for the online collection, use, dissemination and security of data. Although we monitor regulatory developments in this area, any actual or perceived failure by us to comply with these requirements could subject us to significant penalties, lawsuits and negative publicity and require changes to our business practices. In particular, maintaining compliance with these and other evolving regulations and requirements around the world often requires changes to our information system architecture and data storage processes. Making these changes is, and will likely continue to be, difficult and expensive. Investigations by the regulators of data security laws could also result in the payment of fines and harm our reputation. Private actions by affected individuals could also result in significant monetary or reputational damage.
We also share certain data with our sales force. We could face fines, investigations, lawsuits or other legal action if our sales force violates, or is perceived to violate, applicable laws and regulations, and our reputation and brand could be negatively impacted.
Similarly, a failure to adhere to the payment card industry’s data security standards could cause us to incur penalties from payment card associations, termination of our ability to accept credit or debit card payments, litigation and adverse publicity, any of which could have a material adverse effect on our business and financial condition.
In addition, a penetrated or compromised data system or the intentional, inadvertent or negligent release, misuse or disclosure of data could result in theft, loss, or fraudulent or unlawful use of company, employee, sales force or guest data. Although we take measures to protect the security, integrity and confidentiality of our data systems, we experience cyber attacks of varying degrees and types on a regular basis. Our infrastructure may be vulnerable to these attacks, and in some cases it could take time to discover them. Our security measures may also be breached due to employee error or malfeasance, system errors or otherwise. This risk is heightened as a result of changes due to the COVID-19 pandemic as many of our employees are working remotely. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information to gain access to our data or our users’ or customers’ data. Any such breach or unauthorized access could result in the unauthorized disclosure, misuse or loss of sensitive information and lead to significant legal and financial exposure, regulatory inquiries or investigations, loss of confidence by our sales force and customers, disruption of our operations, damage to our reputation, and costs associated with remediating the incident. These risks are heightened as we work with third-party partners,providers, including providers of mobile and cloud technologies, and as our sales force uses social media, as the partnersproviders and social media platforms could be vulnerable to the same types of breaches.breaches and other risks. Acquisition activity, which we have engaged in and which we may continue to engage in, may also heighten these risks, as the systems of the companies we acquire are not under our control prior to the acquisitions and it may take time to evaluate these systems and implement appropriate modifications to them.
Sustainability Risks
Our business could be negatively impacted by corporate citizenship and sustainability matters.
There are increased and increasing expectations and focus from certain investors, Brand Affiliates, consumers, employees, regulators and other stakeholders concerning corporate citizenship and sustainability matters, including environmental, social and governance matters; packaging; responsible sourcing; and diversity, equity and inclusion matters. From time to time, we announce certain initiatives and goals in these areas. We could fail, or be perceived to fail, in our achievement of such initiatives or goals or in meeting stakeholders’ expectations, or we could fail in accurately reporting our progress on such initiatives, goals and expectations. Moreover, the standards by which corporate citizenship and sustainability efforts and related matters are measured are developing and evolving, and certain areas are subject to assumptions. The standards or assumptions could change over time. In addition, we could be criticized for the scope of our initiatives or goals or perceived as not acting responsibly in connection with these matters, such as with our carbon footprint, recyclability of our packaging, ingredients used in our products or the sourcing of such ingredients. Any such matters, or related corporate citizenship and sustainability matters, could have a material adverse effect on our business.
Risks Related to Our Common Stock
The market price of our Class A common stock is subject to significant fluctuations due to a number of factors that are beyond our control.
Our Class A common stock closed at $71.84$57.87 per share on January 29, 2021 and closed at $42.88 per share on January 31, 2018 and closed at $32.59 per share on January 31, 2020.2023. During this two-year period, our Class A common stock traded as low as $32.52$29.96 per share and as high as $88.68$63.85 per share. Many factors, including some we may be unable to control, could cause the market price of our Class A common stock to fall. Some of these factors include:
| ● | fluctuations in our operating results; |
| ● | government investigations of our business; |
| ● | trends or adverse publicity related to our business, products, industry or competitors; |
| ● | the sale of shares of Class A common stock by significant stockholders; |
| ● | demand, and general trends in the market, for our products; |
| ● | acquisitions by us or our competitors; |
| ● | economic or currency exchange issues in markets in which we operate; |
| ● | changes in estimates of our operating performance or changes in recommendations by securities analysts; |
| ● | speculative trading, including short selling and options trading; and |
| ● | general economic, business, regulatory and political conditions. |
Broad market fluctuations could also lower the market price of our Class A common stock regardless of our actual operating performance.
Difficult economic conditions could harm our business.
Difficult economic conditions, such as high unemployment levels, inflation, or recession, have in the past, and could continue to, adversely affect our business by causing a decline in demand for our products, particularly if the economic conditions are prolonged or worsen. In addition, economic conditions may adversely impact access to capital for us and our suppliers, may decrease the ability of the markets in which we operate have currency controls in place, which change from timeour sales force and consumers to timeobtain or maintain credit cards, and may restrictotherwise adversely impact our repatriationoperations and overall financial condition. For example, we believe inflation had a negative impact on our 2022 sales by curbing the discretionary spending of cash.our consumers. Inflation also has increased the cost of our inventory and shipping expenses. Higher interest rates have increased our interest expense, as our credit facility entails variable-rate interest. We believe these conditions could continue in 2023. Current recessionary conditions also cause further uncertainty regarding the potential for growth in our business during 2023.
None.
Our principal properties consist of the following:
Offices
Our principal administrative offices are our corporate headquarters in Provo, Utah and our offices in Shanghai, China.
Distribution Centers
We distribute our products through distribution centers and warehouses in many of our markets, with our principal facilities being in Provo, Utah and Mainland China.
Research and Development Centers
We operate research and development centers in Provo, Utah and in Shanghai, China.
Manufacturing Facilities
We operate manufacturing facilities in Mainland China, and two of the companies in our Rhyz strategic investment arm (Manufacturing segment) operate manufacturing facilities in Provo, Utah, Draper, Utah and Draper,West Valley City, Utah.
We own the above properties, except we lease the manufacturing facilityfacilities in Provo, Utah and West Valley City, Utah, certain of the manufacturing facilities in China, and the land for our facilities in Shanghai, China.
From time to time, we are involved in other legal proceedings arising in the ordinary course of business.
Not applicable.
Market Information and Holders
Our Class A common stock is listed on the New York Stock Exchange and trades under the symbol “NUS.” The approximate number of holders of record of our Class A common stock as of January 31, 20202023 was 251.221. This number of holders of record does not represent the actual number of beneficial owners of shares of our Class A common stock because shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners who have the right to vote their shares.
Purchases of Equity Securities by the Issuer
| (a) | (b) | (c) | (d) | |||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)(1) | ||||||||||||
| October 1 – 31, 2019 | — | $ | — | — | $ | 470.2 | ||||||||||
| November 1 – 30, 2019 | — | — | — | $ | 470.2 | |||||||||||
| December 1 – 31, 2019 | — | — | — | $ | 470.2 | |||||||||||
| Total | — | $ | — | — | ||||||||||||
| (a) | (b) | (c) | (d) | |||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)(1) | ||||||||||||
| October 1 – 31, 2022 | 283,592 | $ | 35.28 | 283,592 | $ | 175.4 | ||||||||||
| November 1 – 30, 2022 | — | — | — | $ | 175.4 | |||||||||||
| December 1 – 31, 2022 | — | — | — | $ | 175.4 | |||||||||||
| Total | 283,592 | $ | 35.28 | 283,592 | ||||||||||||
| (1) | In August 2018, we announced that our board of directors approved a stock repurchase plan. Under this plan, our board of directors authorized the repurchase of up to $500 million of our outstanding Class A common stock on the open market or in privately negotiated transactions. |
Recent Sales of Unregistered Securities
None.
Stock Performance Graph
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Nu Skin Enterprises, Inc., the S&P 500 Index, and the S&P MidCap 400 Consumer Staples Index
| Measured Period | Nu Skin | S&P 500 Index | S&P MidCap 400 Consumer Staples Index | Nu Skin | S&P 500 Index | S&P MidCap 400 Consumer Staples Index | |||||||
| December 31, 2014 | 100.00 | 100.00 | 100.00 | ||||||||||
| December 31, 2015 | 89.49 | 101.38 | 96.43 | ||||||||||
| December 31, 2016 | 116.69 | 113.51 | 109.04 | ||||||||||
| December 31, 2017 | 170.99 | 138.29 | 112.62 | 100.00 | 100.00 | 100.00 | |||||||
| December 31, 2018 | 156.76 | 132.23 | 104.57 | 91.68 | 95.62 | 92.85 | |||||||
| December 31, 2019 | 108.15 | 173.86 | 115.91 | 63.25 | 125.72 | 102.93 | |||||||
| December 31, 2020 | 87.78 | 148.85 | 125.81 | ||||||||||
| December 31, 2021 | 83.97 | 191.58 | 138.49 | ||||||||||
| December 31, 2022 | 72.27 | 156.88 | 137.43 | ||||||||||
The stock performance graph above shall not be deemed to be “soliciting material” or to be “filed” with the U.S. Securities and Exchange Commission or subject to the liabilities of Section 18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, it shall not be deemed incorporated by reference by any statement that incorporates this Annual Report on Form 10-K by reference into any filing under the Securities Act of 1933 (the “Securities Act”) or the Exchange Act, except to the extent that we specifically incorporate this information by reference.
| Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| (U.S. dollars in thousands, except per share data and cash dividends) | ||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||
| Revenue | $ | 2,420,416 | $ | 2,679,008 | $ | 2,279,099 | $ | 2,207,797 | $ | 2,247,047 | ||||||||||
| Cost of sales | 581,420 | 634,140 | 502,078 | 500,457 | (1) | 489,510 | (2) | |||||||||||||
| Gross profit | 1,838,996 | 2,044,868 | 1,777,021 | 1,707,340 | 1,757,537 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Selling expenses | 955,600 | 1,071,020 | 938,024 | 922,083 | 951,372 | |||||||||||||||
| General and administrative expenses | 615,970 | 662,302 | 564,514 | 554,153 | 561,463 | |||||||||||||||
Restructuring and impairment expenses(3) | — | 70,686 | — | — | — | |||||||||||||||
| Total operating expenses | 1,571,570 | 1,804,008 | 1,502,538 | 1,476,236 | 1,512,835 | |||||||||||||||
| Operating income | 267,426 | 240,860 | 274,483 | 231,104 | 244,702 | |||||||||||||||
| Other income (expense), net | (12,254 | ) | (21,194 | ) | (8,916 | ) | (18,265 | ) | (32,743 | )(4) | ||||||||||
| Income before provision for income taxes | 255,172 | 219,666 | 265,567 | 212,839 | 211,959 | |||||||||||||||
| Provision for income taxes | 81,619 | 97,779 | 136,130 | (5) | 69,753 | 78,913 | ||||||||||||||
| Net income | $ | 173,553 | $ | 121,887 | $ | 129,437 | $ | 143,086 | $ | 133,046 | ||||||||||
| Net income per share: | ||||||||||||||||||||
| Basic | $ | 3.13 | $ | 2.21 | $ | 2.45 | $ | 2.58 | $ | 2.29 | ||||||||||
| Diluted | $ | 3.10 | $ | 2.16 | $ | 2.36 | $ | 2.55 | $ | 2.25 | ||||||||||
| Weighted-average common shares outstanding (000s): | ||||||||||||||||||||
| Basic | 55,518 | 55,170 | 52,806 | 55,412 | 57,997 | |||||||||||||||
| Diluted | 55,927 | 56,476 | 54,852 | 56,097 | 59,057 | |||||||||||||||
Balance Sheet Data (at end of period): | ||||||||||||||||||||
| Cash and cash equivalents and current investments | $ | 344,043 | $ | 398,257 | $ | 438,246 | $ | 368,126 | $ | 303,725 | ||||||||||
| Working capital | 383,406 | 359,582 | 330,419 | 315,326 | 298,795 | |||||||||||||||
| Total assets | 1,769,006 | 1,694,446 | 1,589,872 | 1,474,045 | 1,505,843 | |||||||||||||||
| Current portion of long-term debt | 27,500 | 69,455 | 77,840 | 82,727 | 67,849 | |||||||||||||||
| Long-term debt | 334,461 | 361,008 | 310,790 | 334,165 | 181,745 | |||||||||||||||
| Stockholders’ equity | 875,289 | 781,867 | 704,596 | 664,070 | 825,621 | |||||||||||||||
| Cash dividends declared per share | 1.48 | 1.46 | 1.44 | 1.42 | 1.40 | |||||||||||||||
Supplemental Operating Data (at end of period): | ||||||||||||||||||||
Approximate number of Customers(6) | 1,162,905 | 1,244,046 | 1,069,571 | 987,563 | 993,788 | |||||||||||||||
Number of Sales Leaders(7) | 54,760 | 73,455 | 81,878 | 61,627 | 67,575 | |||||||||||||||
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes, which are included in this Annual Report on Form 10-K.
Business Overview
Our Products
In addition to our core Nu Skin business, we also explore new areas of growth and opportunity through our strategic investment arm known as Rhyz Inc. Rhyz investments include personal carebeauty and nutritionalwellness product manufacturing companies and indoor-growing technologies, which are sometimes referred to as controlled-environment agriculture.other investments. In 2019,2022, the Rhyz companies generated $122.0$153.3 million, or 7%, of our 20192022 reported revenue (excluding sales to our core Nu Skin business), substantially all of which was from the manufacturing companies..
Our Global Operations
A Global Network of Customers, Paid Affiliates and Sales Leaders and Customers
As of December 31, 2019,2022, we had 1,162,9051,147,124 persons who purchased products directly from the company during the previous three months (“Customers”). Our Customer numbers include members of our sales force who made such a purchase, including Paid Affiliates and those who qualify as Sales Leaders, but they do not include consumers who purchase directly from members of our sales force. We believe a significant majority of Customers purchase our products primarily for personal or family consumption but are not actively pursuing the opportunity to generate supplemental income by actively and consistently marketing and reselling products.
Our revenue is highly influenced by the number and productivity of our Sales Leaders. Sales Leaders“Sales Leaders” are independent distributors,our Brand Affiliates, and sales employees and independent marketers in Mainland China, who achieve certain qualification requirements. Our reported Sales Leaders number is the three-month average of our monthly Sales Leaders as of the end of each month of the quarter.
As we continue to focus on customer acquisition and social commerce, we believe our number of Paid Affiliates is an important indicator of consumer purchasing activity in our business. “Paid Affiliates” are any Brand Affiliates, as well as members of our sales force in Mainland China, who earned sales compensation during the previous three months. Paid Affiliates power our social commerce model and are a bridge to attracting new customers and nurturing relationships and community.
We have been successful in attracting and motivating our sales force by:
| ● | developing and marketing innovative, technologically and scientifically advanced products; |
| ● | providing compelling initiatives and strong support; and |
| ● | offering an attractive sales compensation structure. |
Our global sales force helps us to rapidly introduce products and penetrate our markets with modest up-front promotional expense. We rely on our sales force to create consumer demand for our products, as opposed to a traditional approach of advertising-generated consumer awareness. Our approach is particularly effective with products that benefit from personal education and demonstration. Similar to other companies in our industry, we experience relatively high turnover among our sales force.
To enhance customer retention, we have developed product subscription and loyalty programs that provide incentives for consumers to commit to purchase a specific amount of product on a monthly basis. All purchases under these programs are subject to our standard product payment and return policies. We believe these subscription and loyalty programs have improved consumer retention, have had a stabilizing impact on revenue and have helped generate recurring sales.
Product Innovation
Our sales force markets and sells our products, and attracts others to the opportunity, based on the distinguishing benefits and innovative characteristics of our products. As a result, we leverage our scientific expertise and product development resources to introduce innovative beauty, wellness and wellnessanti-aging products. We are also seeing a greater use ofOur sales force is increasingly using social media by our sales force to market and sell our products. To continue to leverage social media, it is imperative that we develop demonstrable products that are unique and engaging to younger consumers.
Our Product Launch Process
Sales Leader previews and other product introductions and promotions sometimes generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue during the quarter and can skew year-over-year and sequential comparisons. We believe our product launch process attracts new Customers, Paid Affiliates and Sales Leaders to our business, increases consumer trial and provides us with important marketing and forecasting information about the productsour products. Please refer to Item 1A. Risk Factors for more information on risks related to our company.product launch process.
Income Statement Presentation
We report revenue in nine segments, and we translate revenue from each market’s local currency into U.S. dollars using weighted-average exchange rates. The following table sets forthRevenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue informationis recognized when we satisfy our performance obligations under the contract. We recognize revenue by segmenttransferring the promised products to the customer, with revenue recognized at shipping point, the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the periods indicated. This table should be reviewedtime the products are delivered to or picked up by the customer. In most markets, we offer a return policy that allows our sales force to return unopened and unused product for up to 12 months subject to a 10% restocking fee. Reported revenue is net of returns, which have historically been less than 5% of annual revenue. Sales taxes and value added taxes in connection with the information presented under “Results of Operations,” which describes selling expensesforeign jurisdictions that are collected from customers and other costs associated with generating the aggregate revenue presented.remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
| Year Ended December 31, | ||||||||||||||||||||||||
| (U.S. dollars in millions) | 2019 | 2018 | 2017 | |||||||||||||||||||||
| Nu Skin | ||||||||||||||||||||||||
| Mainland China | $ | 722.5 | 30 | % | $ | 886.5 | 33 | % | $ | 717.0 | 32 | % | ||||||||||||
| Americas/Pacific | 349.1 | 14 | 385.0 | 14 | 342.4 | 15 | ||||||||||||||||||
| South Korea | 330.0 | 14 | 373.4 | 14 | 361.7 | 16 | ||||||||||||||||||
| Southeast Asia | 301.6 | 12 | 316.9 | 12 | 268.6 | 12 | ||||||||||||||||||
| Japan | 260.0 | 11 | 254.9 | 10 | 256.1 | 11 | ||||||||||||||||||
| EMEA | 167.2 | 7 | 182.4 | 7 | 160.3 | 7 | ||||||||||||||||||
| Hong Kong/Taiwan | 166.3 | 7 | 185.9 | 7 | 166.7 | 7 | ||||||||||||||||||
| Other | 1.7 | — | 3.4 | — | 6.3 | — | ||||||||||||||||||
| Total Nu Skin | 2,298.4 | 95 | 2,588.4 | 97 | 2,279.1 | 100 | ||||||||||||||||||
| Manufacturing | 121.9 | 5 | 90.6 | 3 | — | — | ||||||||||||||||||
| Grow Tech | 0.1 | — | — | — | — | — | ||||||||||||||||||
| Total | $ | 2,420.4 | 100 | % | $ | 2,679.0 | 100 | % | $ | 2,279.1 | 100 | % | ||||||||||||
Cost of sales primarily consists of:
| ● | cost of products purchased from third-party vendors; |
| ● |
| ● | cost of adjustments to inventory carrying value; |
| ● | freight cost of shipping products to our sales force and import duties for the products; and |
| ● | royalties and related expenses for licensed technologies. |
Selling expenses are our most significant expense and are classified as operating expenses. Selling expenses include sales commissions paid to our sales force, special incentives, costs for incentive trips, cost of sales force conventions and other rewards, as well as salaries, service fees, benefits, bonuses and other labor and unemployment expenses we pay to our sales force in Mainland China. The sales force conventions are held in various markets worldwide, which we generally expense in the period in which they are incurred. Because our various sales force conventions are not held during each fiscal year, or in the same period each year, their impact on our general and administrative expenses may vary from year to year and from quarter to quarter. For example, we held our global convention in October 2019 and will have another global convention in the fall of 2024, as we currently plan to hold a global convention approximately every other year. Our 2021 global convention was held virtually due to the ongoing pandemic. In addition, we hold regional conventions and conventions in our major markets at different times during the year. These conventions have significant expenses associated with them. Because we have not incurred expenses for these conventions during every fiscal year or in comparable interim periods, year-over-year comparisons have been impacted accordingly. Selling expenses do not include amounts we pay to our sales force based on their personal purchases; rather, such amounts are reflected as reductions to revenue. Our global sales compensation plan, which we employ in all our markets except Mainland China, is an important factor in our ability to attract and retain our Sales Leaders. Under our global sales compensation plan, Sales Leaders can earn “multi-level” compensation, where they earn commissions for product sales to their consumer groups as well as the product sales made through the sales network they have developed and trained. We do not pay commissions on sales materials. Fluctuations occur in the amount of commissions paid as our numbers of Customers and Sales Leaders change from month to month, but the fluctuation in the overall payout as a percentage of revenue tends to be relatively small. Selling expenses as a percentage of revenue typically increase in connection with a significant product offering, due to growth in the number of Sales Leaders qualifying for increased sales compensation and promotional incentives. From time to time, we make modifications and enhancements to our global sales compensation plan in an effort to help motivate our sales force and develop leadership characteristics, which can have an impact on selling expenses. For example, in the fourth quarter of 2017, we began to implement significant enhancements to our global sales compensation plan, which we have now rolled out across all markets other than Mainland China. One of the changes is a new bonus program for our sales force, which has an increasing effect on our selling expenses as a percentage of revenue.
Outside of Mainland China, distributorsBrand Affiliates also have the opportunity to make profits by purchasing products from us at a discount and selling them to consumers with a mark-up. We do not account for, nor pay, additional commissions on these mark-ups received by distributors.Brand Affiliates. In many markets, we also allow individuals who are not part of our sales force, whom we refer to as “preferred customers,” to buy products directly from us at a discount. We pay commissions on preferred customer purchases to the referring member of our sales force.
General and administrative expenses include:
| ● | wages and benefits; |
| ● | rents and utilities; |
| ● | depreciation and amortization; |
| ● | promotion and advertising; |
| ● | professional fees; |
| ● | travel; |
| ● | research and development; and |
| ● | other operating expenses. |
Labor expenses are the most significant portion of our general and administrative expenses. Promotion and advertising expenses include costs of sales force conventions held in various markets worldwide, which we generally expense in the period in which they are incurred. Because our various sales force conventions are not held during each fiscal year, or in the same period each year, their impact on our general and administrative expenses may vary from year to year and from quarter to quarter. For example, we held our global convention in October 2019 and will have another global convention in the fall of 2021, as we currently plan to hold a global convention every other year. In addition, we hold regional conventions and conventions in our major markets at different times during the year. These conventions have significant expenses associated with them. Because we have not incurred expenses for these conventions during every fiscal year or in comparable interim periods, year-over-year comparisons have been impacted accordingly.
Provision for income taxes depends on the statutory tax rates and the withholding taxes in each of the jurisdictions in which we operate. For example, statutory tax rates in 20192022 were approximately 17% in Hong Kong, 20% in Taiwan, 25% in South Korea, 37%32% in Japan and 25% in Mainland China. We are subject to taxation in the United States at the statutory corporate federal tax rate of 21% in 2019,2022, and we pay taxes in multiple states within the United States at various tax rates. Our overall effective tax rate was 32.0%(17.8)% for the year ended December 31, 2019.2022.
Critical Accounting Policies and Estimates
The following critical accounting policies and estimates should be read in conjunction with our audited consolidated financial statements and related notes thereto. Management considers our critical accounting policies to be the recognition of revenue, accounting for income taxes and accounting for intangible assets. In each of these areas, management makes estimates based on historical results, current trends and future projections.
Income Taxes. We account for income taxes in accordance with the Income Taxes Topic of the Financial Accounting Standards Codification. This Topic establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. We take an asset and liability approach for financial accounting and reporting of income taxes. We pay income taxes in many foreign jurisdictions based on the profits realized in those jurisdictions, which can be significantly impacted by terms of intercompany transactions between Nu Skin affiliates around the world. Deferred tax assets and liabilities are created in this process. As of December 31, 2019,2022, we had net deferred tax assets of $20.0$89.3 million. We net these deferred tax assets and deferred tax liabilities by jurisdiction. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized. These deferred tax assets assume sufficient future earnings will exist for their realization, and are calculated using anticipated tax rates. In certain jurisdictions, valuation allowances have been recorded against the deferred tax assets specifically related to use of foreign tax credits, research and development credits and net operating losses. The valuation allowance assessment requires estimates as to future operating results. These estimates are made on an ongoing basis based upon the Company’s business plans and growth strategies in each market and consequently, future material changes in the valuation allowance are possible. The valuation allowance reduces the deferred tax assets to an amount that management determined is more-likely-than-not to be realized. When we determine that there is sufficient taxable income to utilize the foreign tax credits, the research and development credits, or the net operating losses, the valuation allowances will be released. In the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination was made.
We evaluate our indefinite reinvestment assertions with respect to foreign earnings for each period. Other than earnings we intend to reinvest indefinitely, we accrue for the U.S. federal and state income taxes applicable to the earnings. For all foreign earnings, we accrue the applicable foreign income taxes. We intend to utilize the offshore earnings to fund foreign investments, specifically capital expenditures. Undistributed earnings that we have indefinitely reinvested aggregate to $60.0 million as of December 31, 2019.2022. If this amount were repatriated to the United States, the amount of incremental taxes would be approximately $6.0 million.
The company operates in and files income tax returns in the U.S. federal jurisdiction, and in various state andnumerous foreign jurisdictions. The company is no longerjurisdictions, which are subject to examination by tax examinationsauthorities. Years open to examination contain matters that could be subject to differing interpretations of applicable tax laws and regulations related to the amount and/or timing of income, deductions, and tax credits. We account for uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740, Income Taxes. This guidance prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. In 2009, we entered into a voluntary program with the IRS called Compliance Assurance Process (“CAP”). Under the CAP program, the IRS audits the tax position of the Company to identify and resolve any tax issues that may arise throughout the tax year. As of December 31, 2022, tax years through 2020 have been audited and are effectively closed to further examination. For tax years 2021 and 2022, the Company is in the Bridge phase of the CAP program, pursuant to which the IRS will not accept disclosures, will not conduct reviews and will not provide letters of assurance for the Bridge years. There are limited circumstances that tax years in the Bridge phase will be opened for examination. We have applied for the CAP program for tax year 2023 and are currently waiting on approval from the IRS for all years for which tax returns have been filed before 2015.IRS. With a few exceptions, we are no longer subject to state and local income tax examination by tax authorities for the years before 2016. In 2009, we entered into a voluntary program with the IRS called Compliance Assurance Process (“CAP”). The objective2019. Foreign jurisdictions, have varying lengths of CAP is to contemporaneously work with the IRS to achieve federal tax compliance and resolve all or moststatutes of the issues prior to filing of the tax return. We have elected to participate in the CAP programlimitations for 2020 and may elect to continue participating in CAP for future tax years; we may withdraw from the program at any time. In major foreign jurisdictions, we are generally not subject to income tax examinations forexaminations. Some statutes are as short as three years before 2013. However, statutesand in certain markets may be as long as ten years for transfer pricing related issues.years. We are currently under examination in certain foreign jurisdictions; however, the outcomes of those reviews are not yet determinable.
Our unrecognized tax benefits are related to multiple foreign and domestic jurisdictions. There areDue to potential changes in unrecognized tax benefits from the multiple jurisdictions in which we operate, as well as the expiration of various statutes of limitation, andit is reasonably possible completion of tax examinations; however, we do not anticipate that our totalgross unrecognized tax benefits, will significantly change overnet of foreign currency adjustments, may increase within the next 12 months.months by a range of approximately $2.0 to $3.0 million.
At December 31, 2019,2022, we had $13.5$23.1 million in unrecognized tax benefits of which $13.5$23.1 million, if recognized, would affect the effective tax rate. In comparison, at December 31, 2018,2021, we had $11.5$15.1 million in unrecognized tax benefits of which $11.4$15.1 million, if recognized, would affect the effective tax rate. We recognized a benefitan increase of approximately $0.7$5.7 million in interest and penalties expense during the year ended December 31, 2022 and $1.6 million in interest and penalties during the year ended December 31, 2019 and $1.3 million in interest and penalties during the year ended December 31, 2018.2021. We had approximately $3.6$12.4 million, $2.9$6.7 million and $1.6$5.1 million of accrued interest and penalties related to uncertain tax positions at December 31, 2019, 20182022, 2021 and 2017,2020, respectively. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
We are subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. We account for such contingent liabilities in accordance with relevant accounting standards and believe we have appropriately provided for income taxes for all years. Several factors drive the calculation of our tax reserves. Some of these factors include: (i) the expiration of various statutes of limitations; (ii) changes in tax law and regulations; (iii) issuance of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors may result in adjustments to our reserves, which would impact our reported financial results.
We completed the annual goodwill and 2018,indefinite-lived intangible asset impairment testing as of October 1, 2022, and determinedconcluded that it is not more likely than not the carrying value exceeds the fair value of the reporting units. Inunits were determined to be in excess of its carrying amounts and no goodwill impairment charge was required. As of the October 1, 2022 testing date, the fair value of the Manufacturing reporting unit was estimated to be approximately 8% in excess of its carrying amount, and therefore the reporting unit is considered to be at risk of future impairment. The Manufacturing reporting unit’s fair value remains sensitive to significant unfavorable changes in revenue, gross margin and discount rates that could negatively impact future analyses.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the goodwill impairment tests will prove to be an accurate prediction of the future. Although the Manufacturing reporting unit showed strong revenue growth in fiscal year 2017, a quantitative assessment2020 and 2021, the fair value of the reporting unit in the current year was performed. Intangible assets with finite useful livesnegatively impacted by an increase in the discount rate due to the current interest rate environment, and lower near-term revenue projections. Current projections used for the Manufacturing reporting unit reflect revenue growth attributable to the continued expansion of capacity, continued intercompany sales to Nu Skin, and the recent acquisition of new customers. While historical performance and current expectations have resulted in fair values of the Manufacturing reporting unit in excess of carrying values, if the assumptions are amortized to their estimated residual values over such finite lives usingnot realized an impairment charge may be recorded in the straight-line method and reviewed for impairment whenever events or circumstances warrant such a review.future.
Results of Operations
The following table sets forth our operating results as a percentage of revenue for the periods indicated:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
| Cost of sales | 24.0 | 23.7 | 22.0 | 28.3 | 25.0 | 25.5 | ||||||||||||||||||
| Gross profit | 76.0 | 76.3 | 78.0 | 71.7 | 75.0 | 74.5 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | 39.5 | 40.0 | 41.1 | 39.5 | 40.1 | 39.8 | ||||||||||||||||||
| General and administrative expenses | 25.4 | 24.7 | 24.8 | 25.0 | 24.3 | 24.7 | ||||||||||||||||||
| Restructuring and impairment expenses | — | 2.6 | — | 2.2 | 2.0 | — | ||||||||||||||||||
| Total operating expenses | 64.9 | 67.3 | 65.9 | 66.7 | 66.3 | 64.5 | ||||||||||||||||||
| Operating income | 11.0 | 9.0 | 12.1 | 5.0 | 8.7 | 10.0 | ||||||||||||||||||
| Other income (expense), net | (0.5 | ) | (0.8 | ) | (0.4 | ) | (1.0 | ) | (0.1 | ) | (0.1 | ) | ||||||||||||
| Income before provision for income taxes | 10.5 | 8.2 | 11.7 | 4.0 | 8.6 | 9.9 | ||||||||||||||||||
| Provision for income taxes | 3.4 | 3.7 | 6.0 | |||||||||||||||||||||
| Provision (benefit) for income taxes | (0.7 | ) | 3.1 | 2.5 | ||||||||||||||||||||
| Net income | 7.2 | % | 4.5 | % | 5.7 | % | 4.7 | % | 5.5 | % | 7.4 | % | ||||||||||||
Overview
Revenue in 20192022 decreased 10%17% to $2.42$2.23 billion from $2.68$2.70 billion in 2018.2021. Our 2022 revenue was negatively impacted 5% from foreign-currency fluctuations. As of the end of the fourth quarter of 2019,2022, Customers decreased 16%, Paid Affiliates decreased 13% and Sales Leaders were down 25% and Customers were down 7%decreased 21% compared to the prior year. Earnings per share for 2019 were $3.10, compared to $2.16 for 2018.
48
Segment Results
We report our business in nine segments to reflect our current management approach. Effective as of the first quarter of 2019, we reorganized the structureThese segments consist of our segments to separately disclose a Manufacturing segment, which includes the manufacturingseven geographic Nu Skin segments—Americas, Mainland China, Southeast Asia/Pacific, South Korea, Japan, EMEA and packaging subsidiaries that we acquired in the first quarter of 2018, Hong Kong/Taiwan—and a Grow Tech segment, which focuses on developing controlled-environment agriculture technologies. Our our two Rhyz Investment segments—Manufacturing and Grow Tech segments were previously included in theRhyz other. The Nu Skin Other category.Effective as of the first quarter of 2018, we reorganized the structure of our segments to reflect that our Pacific region, which was previously managedcategory includes miscellaneous corporate revenue and related adjustments. The Rhyz other segment includes other investments by our Southeast Asia regional management and was included in our South Asia/Pacific operating segment, is now managed by our Americas regional management and is included in our Americas/Pacific operating segment. Segment information for the year ended December 31, 2018 has been recast to reflect this change.Rhyz strategic investment arm, which were entered into during 2021.
The following table sets forth revenue for the years ended December 31, 20192022 and 20182021 for each of our reportable segments (U.S. dollars in thousands):
| Constant | Constant | |||||||||||||||||||||||||||||||
| Year Ended December 31, | Currency | Year Ended December 31, | Currency | |||||||||||||||||||||||||||||
| 2019 | 2018 | Change | Change(1) | 2022 | 2021 | Change | Change(1) | |||||||||||||||||||||||||
| Nu Skin | ||||||||||||||||||||||||||||||||
| Americas | $ | 508,537 | $ | 547,755 | (7 | )% | (5 | )% | ||||||||||||||||||||||||
| Mainland China | $ | 722,526 | $ | 886,472 | (18 | )% | (15 | )% | 360,389 | 568,774 | (37 | )% | (35 | )% | ||||||||||||||||||
| Americas/Pacific | 349,078 | 385,034 | (9 | )% | (4 | )% | ||||||||||||||||||||||||||
| Southeast Asia/Pacific | 344,411 | 336,651 | 2 | % | 7 | % | ||||||||||||||||||||||||||
| South Korea | 329,978 | 373,357 | (12 | )% | (6 | )% | 268,707 | 354,252 | (24 | )% | (15 | )% | ||||||||||||||||||||
| Southeast Asia | 301,620 | 316,890 | (5 | )% | (5 | )% | ||||||||||||||||||||||||||
| Japan | 260,039 | 254,939 | 2 | % | 1 | % | 224,896 | 266,216 | (16 | )% | — | |||||||||||||||||||||
| EMEA | 167,165 | 182,394 | (8 | )% | (3 | )% | 204,275 | 283,200 | (28 | )% | (19 | )% | ||||||||||||||||||||
| Hong Kong/ Taiwan | 166,335 | 185,893 | (11 | )% | (9 | )% | 157,197 | 162,611 | (3 | )% | 1 | % | ||||||||||||||||||||
| Other | 1,621 | 3,423 | (53 | )% | (53 | )% | 3,959 | 3,653 | 8 | % | 8 | % | ||||||||||||||||||||
| Total Nu Skin | 2,298,362 | 2,588,402 | (11 | )% | (8 | )% | 2,072,371 | 2,523,112 | (18 | )% | (12 | )% | ||||||||||||||||||||
| Rhyz Investments | ||||||||||||||||||||||||||||||||
| Manufacturing | 121,917 | 90,606 | 35 | % | 35 | % | 149,458 | 172,120 | (13 | )% | (13 | )% | ||||||||||||||||||||
| Grow Tech | 137 | — | 100 | % | 100 | % | ||||||||||||||||||||||||||
| Rhyz Other | 3,830 | 437 | 776 | % | 776 | % | ||||||||||||||||||||||||||
| Total Rhyz Investments | 153,288 | 172,557 | (11 | )% | (11 | )% | ||||||||||||||||||||||||||
| Total | $ | 2,420,416 | $ | 2,679,008 | (10 | )% | (7 | )% | $ | 2,225,659 | $ | 2,695,669 | (17 | )% | (12 | )% | ||||||||||||||||
| (1) | Constant-currency revenue change is a non-GAAP financial measure. See “Non-GAAP Financial Measures,” below. |
The table below sets forth segment contribution for the years ended December 31, 20192022 and 20182021 for each of our reportable segments (U.S. dollars in thousands). Segment contribution excludes certain intercompany charges, specifically royalties, license fees, transfer pricing and other miscellaneous items. We use segment contribution to measure the portion of profitability that the segment managers have the ability to control for their respective segments. For additional information regarding our segments and the calculation of segment contribution, see Note 1815 to the consolidated financial statements contained in this report.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2019 | 2018 | Change | 2022 | 2021 | Change | |||||||||||||||||||
| Nu Skin | ||||||||||||||||||||||||
| Americas | $ | 110,522 | $ | 116,265 | (5 | )% | ||||||||||||||||||
| Mainland China | $ | 191,570 | $ | 253,598 | (24 | )% | 72,362 | 151,645 | (52 | )% | ||||||||||||||
| Americas/Pacific | 57,090 | 52,433 | 9 | % | ||||||||||||||||||||
| Southeast Asia/Pacific | 85,827 | 81,779 | 5 | % | ||||||||||||||||||||
| South Korea | 99,892 | 107,215 | (7 | )% | 81,804 | 114,034 | (28 | )% | ||||||||||||||||
| Southeast Asia | 82,455 | 78,598 | 5 | % | ||||||||||||||||||||
| Japan | 61,081 | 56,676 | 8 | % | 54,976 | 67,511 | (19 | )% | ||||||||||||||||
| EMEA | 10,195 | 14,773 | (31 | )% | 21,446 | 41,988 | (49 | )% | ||||||||||||||||
| Hong Kong/Taiwan | 33,569 | 33,392 | 1 | % | 35,253 | 37,330 | (6 | )% | ||||||||||||||||
| Total Nu Skin | 535,852 | 596,685 | (10 | )% | 462,190 | 610,552 | (24 | )% | ||||||||||||||||
| Rhyz Investments | ||||||||||||||||||||||||
| Manufacturing | 15,693 | 7,754 | 102 | % | 3,570 | 18,346 | (81 | )% | ||||||||||||||||
| Grow Tech | (19,509 | ) | (9,228 | ) | (111 | )% | ||||||||||||||||||
| Rhyz Other | (6,180 | ) | (1,813 | ) | (241 | )% | ||||||||||||||||||
| Total Rhyz Investments | (2,610 | ) | 16,533 | (116 | )% | |||||||||||||||||||
The following table providestables provide information concerning the number of Customers, Paid Affiliates and Sales Leaders in our core Nu Skin business as of December 31, 20192022 and 2018. “Customers” are persons who have purchased products directly from2021. During the Company duringfirst quarter of 2022, in connection with the three months ended asintroduction of the date indicated. Our Customer numbers do not include consumers who purchase products directly from membersnew metric Paid Affiliates, we reviewed how we currently present Sales Leaders and adjusted that metric’s definition to what we believe provides a better insight into the trends of our sales force. “Sales Leaders” are independent distributors, and sales employees and independent marketers in Mainland China, who achieve certain qualification requirements. Our Velocity sales compensation program enhancements have adjusted the requirements for qualifying and maintaining “Sales Leader” status, which has impacted the numberbusiness. The definition of independent distributors under our global compensation program who achieve such requirements. For example, the sales volume necessary to achieve initial qualification has been increased in some markets, financial rewards have been increased for higher monthly sales productivity, and qualification requirements to maintain and advance status have been modified. The enhanced program also provides some flexibility to remain a Sales Leader with a lower sales volume for a short time. We began introducing Velocity in the fourth quarter of 2017 and continued rolling it out across our markets through the first half of 2019.Customer metric remained unchanged. We have now introduced Velocity in all of our markets other than Mainland China, which operates under a different business model and is not impacted by these changes.recast the 2021 Sales Leaders to the new definition.
| ● | “Customers” are persons who have purchased directly from the Company during the three months ended as of the date indicated. Our Customer numbers include members of our sales force who made such a purchase, including Paid Affiliates and those who qualify as Sales Leaders, but they do not include consumers who purchase directly from members of our sales force. |
| ● | “Paid Affiliates” are any Brand Affiliates, as well as members of our sales force in Mainland China, who earned sales compensation during the three-month period. In all of our markets besides Mainland China, we refer to members of our independent sales force as “Brand Affiliates” because their primary role is to promote our brand and products through their personal social networks. |
| ● | “Sales Leaders” are the three-month average of our monthly Brand Affiliates, as well as sales employees and independent marketers in Mainland China, who achieved certain qualification requirements as of the end of each month of the quarter. |
Three Months Ended December 31, | ||||||||||||
| Customers | 2022 | 2021 | Change | |||||||||
| Americas | 299,287 | 336,564 | (11 | )% | ||||||||
| Mainland China | 202,933 | 315,418 | (36 | )% | ||||||||
| Southeast Asia/Pacific | 141,183 | 169,601 | (17 | )% | ||||||||
| South Korea | 123,749 | 146,354 | (15 | )% | ||||||||
| Japan | 119,152 | 122,813 | (3 | )% | ||||||||
| EMEA | 197,917 | 210,414 | (6 | )% | ||||||||
| Hong Kong/Taiwan | 62,903 | 66,395 | (5 | )% | ||||||||
| Total | 1,147,124 | 1,367,559 | (16 | )% | ||||||||
Three Months Ended December 31, | ||||||||||||
| Paid Affiliates | 2022 | 2021 | Change | |||||||||
| Americas | 42,633 | 49,328 | (14 | )% | ||||||||
| Mainland China | 23,436 | 30,546 | (23 | )% | ||||||||
| Southeast Asia/Pacific | 38,653 | 44,050 | (12 | )% | ||||||||
| South Korea | 45,058 | 52,036 | (13 | )% | ||||||||
| Japan | 38,021 | 38,428 | (1 | )% | ||||||||
| EMEA | 31,869 | 36,482 | (13 | )% | ||||||||
| Hong Kong/Taiwan | 17,286 | 20,155 | (14 | )% | ||||||||
| Total | 236,956 | 271,025 | (13 | )% | ||||||||
Three Months Ended December 31, | ||||||||||||
| Sales Leaders | 2022 | 2021 | Change | |||||||||
| Americas | 9,594 | 10,879 | (12 | )% | ||||||||
Mainland China(1) | 12,359 | 18,207 | (32 | )% | ||||||||
| Southeast Asia/Pacific | 6,999 | 8,800 | (20 | )% | ||||||||
| South Korea | 6,094 | 8,224 | (26 | )% | ||||||||
| Japan | 5,936 | 5,864 | 1 | % | ||||||||
| EMEA | 4,740 | 5,743 | (17 | )% | ||||||||
| Hong Kong/Taiwan | 3,015 | 3,666 | (18 | )% | ||||||||
| Total | 48,737 | 61,383 | (21 | )% | ||||||||
| As of December 31, 2019 | As of December 31, 2018 | % Increase (Decrease) | ||||||||||||||||||||||
| Customers | Sales Leaders | Customers | Sales Leaders | Customers | Sales Leaders | |||||||||||||||||||
| Mainland China | 292,812 | 17,987 | 303,789 | 33,129 | (4 | )% | (46 | )% | ||||||||||||||||
| Americas/Pacific | 220,216 | 7,607 | 248,609 | 8,354 | (11 | )% | (9 | )% | ||||||||||||||||
| South Korea | 168,972 | 7,251 | 182,026 | 7,565 | (7 | )% | (4 | )% | ||||||||||||||||
| Southeast Asia | 136,349 | 7,480 | 153,465 | 8,933 | (11 | )% | (16 | )% | ||||||||||||||||
| Japan | 125,557 | 5,916 | 130,181 | 5,916 | (4 | )% | — | |||||||||||||||||
| EMEA | 153,330 | 4,619 | 149,085 | 4,791 | 3 | % | (4 | )% | ||||||||||||||||
| Hong Kong/Taiwan | 65,669 | 3,900 | 76,891 | 4,767 | (15 | )% | (18 | )% | ||||||||||||||||
| Total | 1,162,905 | 54,760 | 1,244,046 | 73,455 | (7 | )% | (25 | )% | ||||||||||||||||
| (1) | The December 31, 2022 number reflects a modified Sales Leader definition. See “Mainland China,” below. |
Following is a narrative discussion of our results in each segment, which supplements the tables above.
Americas. Our Americas segment continued to be challenged by macroeconomic issues in our Latin America markets, which drove the decline in revenue, Customers, Paid Affiliates and Sales Leaders for fiscal year 2022. Our U.S. market revenue increased 4% for the year, on top of 32% revenue growth in 2021, due to continued social selling momentum and subscription enrollment. During the back half of 2022, we launched ageLOC LumiSpa iO, which generated approximately $20.8 million of revenue.
The year-over-year decline in segment contribution primarily reflects the decline in revenue, along with a 1.3 percentage point decrease in gross margin, from increased sales discounts and promotions during the year, partially offset by a 2.0 percentage point decrease in selling expenses from sales mix, as our products have differing commission percentages assigned to them.
Mainland China. The year-over-year decreaseOur Mainland China market continued to be challenged during 2022, with continued pressures from COVID-related lockdowns and other factors, which negatively impacted our selling and promotional activities. We anticipate the constraints will continue throughout the first half of 2023. As a result of the economic headwinds in revenue andthe market we made some modifications to the compensation plan during the third quarter of 2022, which provides leaders more flexible requirements to maintain their business. Our Mainland China Sales Leaders number as of December 31, 2022 reflects these modified requirements. We believe the regulatory environment in Mainland China for 2019 reflectsis becoming increasingly challenging and will continue to be so over the restrictions onmedium and long terms. We currently plan to implement certain changes to the structure of our sales meetings. In addition, we believecompensation in Mainland China due to the negative media scrutiny of the industry hadevolving commercial and regulatory environment. These changes could have a negative impact on consumer sentiment, which also made it more difficult to attract and retain Customers and Sales Leaders. As previously disclosed, during the first half of 2019, the Mainland China government conducted a 100-day campaign to review and inspect the health products and direct selling industries. In connection with this campaign, the government’s scrutiny of activities within the health products and direct selling industries was during 2019, and continues to be, at higher levels. During this time, we have been receiving and addressing an increased number of government reviews, inspections, inquiries and consumer complaintsour sales in Mainland China, and our ability to hold certain business meetings has been limited. The decline in revenue also reflects the negative impact of foreign-currency fluctuations of 3%. Due in part to the restrictions on sales meetings, we increased customer initiatives during 2019, which we believe helped the Customer number to decline only slightly despite the large decrease in Sales Leaders.that market.
The year-over-year decrease in segment contribution primarily reflects lower revenue in 2019. In addition, selling expense2022, a 2.7 percentage point decrease in gross margin from increased product promotions and discounts during the year, and an increase in general and administrative expenses as a percentage of revenue increased 2.2 percentage points. The salaries and service feesdue to the fixed nature of our sales force in Mainland China are fixed until they are adjusted in a quarterly evaluation process. As a result, we have variations in our sellingthese expenses as a percentage of revenue, particularly when there is a sequential change inon lower revenue.
from unfavorable foreign-currency fluctuationsAmericas/Pacific. TheOur revenue benefited from the launch of ageLOC Meta (locally referred to as ageLOC Reset year-over-year decreasesin the Southeast Asia markets), which generated $48.1 million in revenue for 2022, compared to $15.6 million during the fourth quarter of 2021 launch. Our decline in Sales Leaders and Customers were significantly impactedwas partially driven by our Argentina market, where the economy is experiencing hyperinflation. The revenuefourth quarter 2021 launch of ageLOC Meta, which led to higher Sales Leaders for 2021. Our product promotions and launches were focused on re-energizing our existing Sales Leaders, which led to a decline in our Argentina market accounts for over $22.2 million of the total decline for the segment for 2019. We have implemented price increases in response to inflation in Argentina. Our revenue in this segment was negatively impacted 5% from foreign-currency fluctuations for 2019, primarily due to the weakening Argentine peso. The declines in revenue, Sales LeadersCustomers and Customers in this segment also reflect continued softness in our North America markets, coupled with the lack of a significant new product launch in 2019.Paid Affiliates.
The year-over-year increase in segment contribution for 20192022 primarily reflects a declinethe increase in general and administrative expense from headcount reductions from our 2018 restructuring plan, and incremental cost-saving initiatives, along with improvements in gross margin from product mix, partially offset by the decline in revenue.revenue
South Korea. Although our business inOur South Korea market was challenged from a 2022 price increase to address the inflationary pressures, along with continued to be challengedCOVID-related disruptions during the first half of 2022, resulting in 2019, it showed stabilization during 2019.a decline of revenue, Customers, Paid Affiliates, and Sales Leaders. Our reported revenue2021 results also reflects a negative impact of 6%benefited from foreign-currency fluctuations for 2019. Additionally, during the fourth quarter launch of 2018, we launched a new product that generated incremental revenue of $14.2ageLOC Meta, which contributed $29 million in 2018 overrevenue compared to $19.7 million for the amount generated in 2019. Competitive pressures have continued to negatively affect ourfull year 2022. Our 2022 revenue Sales Leaders and Customer acquisition in this segment.declined 24%, including a 9% negative impact from unfavorable foreign-currency fluctuations.
The year-over-year decrease in segment contribution primarily reflects the decline in revenue, partially offset by improved gross margin from favorable sales mix andalong with a 2.61.0 percentage point declineincrease in selling expenseexpenses as a percentage of revenue.
The year-over-year decrease in segment contribution for 2019is primarily reflects lowerattributable to the decline in reported revenue, in 2019, along with a 1.9 percentage-pointdecline in gross margin from product mix.
EMEA. The continued softening of momentum in our EMEA segment was driven by distractions to our sales force from the ongoing geopolitical Russia/Ukraine conflict, along with inflationary pressures driven by the sharp increase in selling expense asenergy cost in EMEA, which led to a percentagedecline in revenue, Customers, Paid Affiliates and Sales Leaders. Our reported revenue was also negatively impacted 9% by unfavorable foreign-currency fluctuations. During 2022, we suspended business operations in Ukraine and closed our market in Russia. The Russia and Ukraine markets have historically accounted for less than 1% of our consolidated revenue.
Hong Kong/Taiwan. The year-over-year decline in revenue, Sales Leaders and Customers in ourOur Hong Kong/Taiwan segment reflects business disruptions from the social incidentsreported a 3% decline in Hong Kong. It is uncertain when the situation will be resolved.
The year-over-year decrease in segment contribution is primarily attributable to the decline in reported revenue, along with a 1.6 percentage point decrease in gross margin.
Manufacturing. Our Manufacturing segment generated a 35% increase in revenue declined 13% for 2019. Our previous investment in additional capacity has allowed our manufacturing companies to continue to increase revenue. The companies in this segment were acquired during the first quarter of 2018; as a result, the year-over-year revenue comparison reflects only a partial period in 2018. These companies provide products and services both2022, primarily due to our Nu Skin business and external customers. Reported revenue includes only the revenue generated by sales to external customers.customers rebalancing their inventory from higher levels in 2021, reducing demand in 2022.
The $7.9 million improvementdecline in segment contribution reflectsis attributable to lower revenue, the mix of revenue between our manufacturing entities with differing profitability levels and increases and improved gross margin, primarily due to purchase accounting adjustments recorded in 2018.obsolete inventory.
Consolidated Results
Revenue
Revenue for the year ended December 31, 20192022 decreased 10%17% to $2.42$2.23 billion, compared to $2.68$2.70 billion in the prior-year period. For a discussion and analysis of this increase in revenue, see “Overview” and “Segment Results,” above.
Gross profit
Gross profit as a percentage of revenue decreased to 76.0%71.7% in 2019,2022, compared to 76.3%75.0% in 2018.2021. Gross profit as a percentage of revenue for core Nu Skin increased 0.3%decreased 2.8 percentage points to 78.4%. The increased revenue for75.4%, primarily driven by our Manufacturing segment, pairedstrategic decision to align our inventory on hand with lower revenue for our corefuture sales and promotional plans, which resulted in an incremental $26.9 million write-off, and is recorded in our Corporate and other category. Our Nu Skin business, lowered consolidated gross margin for 2019. As previously disclosed, thewas also negatively impacted by increased sales promotion and a shift in our geographical revenue mix, as our markets have differing gross margin of our Manufacturing segment is significantly lower than that of our core Nu Skin business.margins.
Selling expenses
Selling expenses as a percentage of revenue decreased to 39.5% in 20192022, compared to 40.0% in 2018. This decrease was driven by the increase in revenue from our Manufacturing segment, which does not carry significant selling expenses and therefore lowered consolidated selling expenses. 40.1% for 2021. Our core Nu Skin business’s selling expense as a percentage of revenue increased 0.2decreased 0.5 percentage points to 41.6%42.3% for 2019,2022, compared to 41.4%42.8% for 2018.2021. Selling expenses for our core Nu Skin business are driven by the specific performance of our individual Sales Leaders. Given the size of our sales force and the various components of our compensation and incentive programs, selling expenses as a percentage of revenue typically fluctuate plus or minus approximately 100 basis points from period to period.
General and administrative expenses
General and administrative expenses decreased to $616.0$555.8 million in 2019,2022, compared to $662.3$654.4 million in 2018.2021. The $46.3$98.6 million decrease primarily relatesreflects an approximately $50.0 million decrease to decreases in labor expense due to decreasedexpenses from lower employee headcount during 2019, primarilyperformance incentive compensation and savings realized from our 2022 restructuring plan, as a result of our restructuring program inwell as the impact from the fourth quarter 2021 exit of 2018the Grow Tech segment, which incurred $25.3 million in general and higher employee incentive compensation for 2018 from achievement of performance goals. administrative expenses in 2021. As a percentage of revenue, general and administrative increased 0.7%0.7 percentage points to 25.4%25.0% for 2019,2022, compared to 24.7%24.3% for 2018.2021.
Restructuring and impairment expenses
In the fourth quarter of 2018,2021, we adopted a restructuring program. This program primarily impactedWe determined to exit our information technology infrastructureGrow Tech segment, as a strategic shift to better align our resources on key strategic initiatives to achieve the future growth objectives and organization and other departments within our corporate and Americas offices.priorities of the core Nu Skin business. As a result of the restructuring program, we recorded $51.9 million in restructuring and impairment charges in 2021, consisting primarily of a non-cash charge of $48.6$38.5 million for impairment of information technologygoodwill, intangibles and fixed assets, including internally developed software for our social sharing and digital initiatives, and $22.1$20.0 million of cash charges, including $20.1$6.5 million for employee severance and $2.0$13.5 million for other related cash charges associated with our restructuring. We additionally recorded $7.2During 2022, we incurred $5 million of non-cash inventory write-offs as restructuringin incremental cash charges which were recorded in cost of salesassociated with the exit activities and in connection with our business strategy.legal settlements. The restructuring charges were predominately recorded in our previous Grow Tech segment, which has been recast to Corporate & Other.
In the third quarter of 2022, we adopted a strategic plan to focus resources on our strategic priorities and Other category. As of December 31, 2019,optimize future growth and profitability. The global program includes workforce reductions and footprint optimization. We estimate total charges under the program has been completedwill approximate $50–$55 million, with $40–$45 million in cash charges of severance and all payments have been made.lease termination cost and approximately $10 million of non-cash charges of impairment of fixed assets and other intangibles related to the footprint optimization. We expect to substantially complete the program during the first half of 2023. During 2022, we incurred charges to be settled in cash of $20.1 million in severance charges, $7.4 million in lease termination cost, and $5.2 million in other associated cost, and non-cash charges of $8.2 million in fixed asset impairments, $0.9 million in accelerated depreciation and $1.7 million in impairment of other intangibles.
Other income (expense), net
Other income (expense), net for 20192022 was $12.3$(21.9) million of expense, compared to $21.2$(1.5) million of expense in 2018.2021. The decreasesincrease in other expense for 2022 is attributable to a $9.3 million unrealized investment loss for 2022 related to a controlled environment agriculture company we invested in as part of our previous Grow Tech segment, a $1.8 million increase in interest expense from the higher interest rates during the back half of 2022, and a $1.2 million increase in foreign currency losses from the strengthening of the U.S. dollar. The increase in expense primarily reflect foreign-currency fluctuations; foreign-currency translation losses decreased $12.6 million for 2019. The foreign-currency translation losses primarily related to fluctuations of the Argentine peso and the Chinese RMB compared to the U.S. dollar for 2018. The decrease in expense for 2019 additionallyalso reflects a non-cash charge of $7.2$18.1 million unrealized investment gain in the first quarter of 2018 related to the conversion of our then-outstanding convertible notes,2021, which was partially offset by a non-cash gain of $13.6$10.7 million loss on our step acquisitionsasset disposal in the first quarter of 2018, as the fair value of our pre-acquisition interests in these companies exceeded the book value at the time of the acquisitions.2021.
Provision for income taxes
Provision (benefit) for income taxes decreased to $81.6$(15.8) million in 20192022 from $97.8$85.2 million in 2018.2021. Our effective tax rate decreased to 32.0%(17.8)% of pre-tax income in 20192022 from 44.5%36.6% in 2018. Our 20182021. The decrease in the effective tax rate was impacted significantly byfor 2022 is primarily due to the restructuring and impairment expenses incurred in the fourth quarterrelease of 2018, which reduced our pre-tax income.valuation allowance on foreign tax credits.
For 2020,2023, we currently anticipate that our effective tax rate will be approximately 31-37%18-26%. Our actual 20202023 effective tax rate could differ materially from this estimate. Our future effective tax rates could fluctuate significantly, being affected by numerous factors, such as intercompany transactions, changes in our business operations, foreign audits, increases in uncertain tax positions, acquisitions, entry into new markets, the amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have a lower statutory rate and higher than anticipated in jurisdictions where we have a higher statutory rate, losses incurred in jurisdictions, the inability to realize tax benefits, withholding taxes, changes in foreign currency exchange rates, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation.
Net income
As a result of the foregoing factors, net income in 2019 increased2022 decreased to $173.6$104.8 million, compared to $121.9$147.3 million in 2018.2021.
For a comparison of our operating results for 20182021 compared to 2017,2020, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 5246 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2021, as filed with the SEC on February 14, 2019.16, 2022.
Liquidity and Capital Resources
Historically, our principal uses of cash have included operating expenses (particularly selling expenses) and working capital (principally inventory purchases), as well as capital expenditures, stock repurchases, dividends, debt repayment and the development of operations in new markets. We have at times incurred long-term debt, or drawn on our revolving line of credit, to fund strategic transactions, stock repurchases, capital investments and short-term operating needs. We typically generate positive cash flow from operations due to favorable margins and have generally relied on cash from operations to fund operating activities. We generated $177.9$108.1 million in cash from operations during 2019,2022, compared to $202.7$141.6 million in cash from operations during 2018. This2021. The decrease in cash generatedflow from operations during 2019 primarily reflects higher payout of accrualsexpenses associated with our 2021 and 2022 restructuring programs, partially offset by an approximate $40.3 million decline in inventory during 2022, compared to an increase in the first quarter of 2019, mainly attributableprior year, as we continue to severance payments related to our 2018 restructuring, and higher commission payments due to a strong fourth quarter of 2018.optimize inventory levels.
As of December 31, 2019,2022, cash and cash equivalents, including current investments, were $344.0$278.5 million compared to $398.3$354.8 million as of December 31, 2018. This2021. The decrease in cash and cash equivalents during the year primarily reflects our quarterly dividend payments, debt repayments, andrepurchases of our stock, the purchases of property and equipment, partially offset by cash flow from operations and proceeds from debt.payment on liabilities associated with our 2021 and 2022 restructuring programs. Working capital as of December 31, 20192022 was $383.4$400.6 million compared to $359.6$343.3 million as of December 31, 2018.2021. The increase in working capital was primarilyis attributable to an increased prepaid expense,our second quarter debt modification, which for 2022 resulted in a decreasenet $27.5 million of incremental borrowings, while shifting $82.5 million from current to accruals fromlong-term debt.
Cash requirements. For 2023, we currently expect that our material cash requirements will include the payout of the severance in the first quarter of 2019, and a decrease in our borrowings on the revolving line of credit, which was partially offset by the lower cash balance at the end of 2019, compared to 2018.following:
| ● | Cash requirements for operating activities. Our operating expenses typically total approximately 85%-90% of our revenue, with compensation to our sales force constituting 40%-43% of our core Nu Skin revenue. These compensation expenses consist primarily of commission payments, which we generally pay to our sales force within approximately one to two months of the sale. Inventory purchases have historically constituted approximately 15%-20% of our revenue. On average, we purchase our inventory approximately three to six months prior to sale. While our actual cash usage may vary based on the timing of payments, we currently expect these approximate percentages and payment practices to continue in 2023. In addition, we expect our 2023 lease payments will be approximately $29.9 million. |
| ● | Cash requirements for investing activities. As discussed in more detail below, our capital expenditures are expected to be $75-95 million for 2023. |
| ● | Cash requirements for financing activities. In 2023 we are obligated to make a total of $15.0 million in quarterly principal payments plus the associated interest on our term loan. We also anticipate paying quarterly cash dividends throughout 2023, approximating $19-20 million per quarter depending on the number of shares outstanding as of record date. Additional details about our dividends and term loan are provided below. |
For 2024 and onward, we currently expect the above material cash requirements will remain. See Note 6 and Note 7 to the consolidated financial statements contained in this report for our future cash requirements related to our debt principal repayment and our maturities of lease liabilities.
We intend to fund the aforementioned cash requirements with our cash from operations and draw on our revolving credit facility, as needed, to address any short-term funding requirements.
Capital expenditures. Capital expenditures in 20192022 totaled $66.1$59.1 million. WeAs with 2022, we expect that the capital expenditures in 20202023 will be primarily related to:
| ● | the expansion and upgrade of facilities in our various markets; |
| ● | purchases and expenditures for computer systems and equipment, software, and application development; and |
| ● |
We estimate that capital expenditures for the uses listed above will total approximately $60–70$75–95 million for 2020. In addition, we2023. We are also in the building phase for acurrently expecting to complete construction of our new manufacturing plant in Mainland China. To dateChina in the first half of 2023. As of December 31, 2022, we have spent approximately $13$50.7 million on this project, including $13.4 million in 2022, and expect that our expenditures for this project will total approximately $55$54-56 million, over the next 2-3 years, including approximately $15-18$3-5 million during 2020.2023.
54
Credit agreementAgreement. In April 2018,On June 14, 2022, we entered into aan Amended and Restated Credit Agreement (the “Credit Agreement”) with various financial institutions as lenders and Bank of America, N.A., as administrative agent. The Credit Agreement provides for a $400.0 million term loan facility and a $350.0$500.0 million revolving credit facility, each with a term of five years. Concurrently with the closing of the Credit Agreement, we drew the full amount of the term loan facility and $78.5 million of the revolving facility, each of which initially bear interest at the London Interbank Offered Rate (“LIBOR”) plus 2.25%. We used the proceeds of the term loan and the draw on the revolving facility to pay off the Previous Credit Agreement, as defined below, andprevious credit agreement. Both facilities bear interest at the outstanding balance on the Convertible Notes. The interest rate applicable to the facilities is subject to adjustmentSecured Overnight Financing Rate (“SOFR”), plus a margin based on our consolidated leverage ratio. The term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 2.5% during the first year and 5.0% during the first and secondsubsequent years 7.5% during the third and fourth years and 10.0% during the fifth year after the closing date of the Credit Agreement, with the remainder payable at final maturity. As of December 31, 2022, we had $10.0 million of outstanding borrowings under our revolving credit facility, and $395.0 million on our term loan facility. The carrying value of the debt also reflects debt issuance costs of $2.5 million as of December 31, 2022, related to the Credit Agreement. The Credit Agreement requires us to maintain a consolidated leverage ratio not exceeding 2.25 to 1.00 and a consolidated interest coverage ratio of no less than 3.00 to 1.00. We are currentlyAs of December 31, 2022, we were in compliance with all debt covenants under the Credit Agreement.
Modification of previous credit agreementagreement.. In April 2018, On June 14, 2022, we repaid our outstanding debt that was outstanding under our previous credit agreement, dated as of October 9, 2014 (the “Previous Credit Agreement”)April 18, 2018, with variousseveral financial institutions as lenders and Bank of America, N.A., as administrative agent. We had indebtedness of $257.6$70.0 million inon our revolver as of December 31, 2021, and $307.5 million on our term loan as of December 31, 2021.
Derivative instruments. As of December 31, 2022, we had four interest rate swaps, with a total notional principal amount outstandingof $200 million and a maturity date of July 31, 2025. We entered into these interest rate swap arrangements during the third quarter of 2020 to hedge the variable cash flows associated with our variable-rate debt under the Previous Credit Agreement as of both March 31, 2018 and the repayment date of April 18, 2018. See Note 6 to the consolidated financial statements contained in this Annual Report for further information regarding the Credit Agreement, Convertible Notes and other debt.Agreement.
Stock repurchase plan. In 2018, our board of directors approved a stock repurchase plan authorizing us to repurchase up to $500.0 million of our outstanding shares of Class A common stock on the open market or in private transactions. During 2019,2022, we repurchased approximately 14,0001.7 million shares of our Class A common stock under the plan for $0.8$70.0 million. As of December 31, 2019, $470.22022, $175.4 million was available for repurchases under the plan. Our stock repurchases are used primarily to offset dilution from our equity incentive plans and for strategic initiatives.
Dividends. OurWe paid quarterly cash dividends of $0.385 per share in March, June, September and December of 2022, for a total of $19.3 million, $19.4 million, $19.3 million and $19.0 million, respectively. In February 2023, our board of directors declared and paid cash dividends on our Class A common stock of $0.37 per share during each quarter of 2019. These quarterly cash dividends totaled approximately $82.2 million. The board of directors has approved an increaseda quarterly cash dividend of $0.375$0.39 per share of Class A common stock to be paid on March 11, 2020,8, 2023 to stockholders of record on February 28, 2020. Annually, this would increase the dividend to $1.50 from $1.48 in 2019.27, 2023. Currently, we anticipate that our board of directors will continue to declare quarterly cash dividends and that the cash flows from operations will be sufficient to fund our future dividend payments. However, the continued declaration of dividends is subject to the discretion of our board of directors and will depend upon various factors, including our net earnings, financial condition, cash requirements, future prospects and other relevant factors.
Cash from foreign subsidiaries. As of December 31, 20192022 and 2018,2021, we held $344.0$278.5 million and $398.3$354.8 million, respectively, in cash and cash equivalents, including current investments. These amounts include $277.9$223.0 million and $348.1$274.9 million as of December 31, 20192022 and 2018,2021, respectively, held in our operations outside of the United StatesStates. Substantially all of our non-U.S. cash and cash equivalents are readily convertible into U.S. dollars or other currencies, subject to procedural or other requirements in certain markets, as well as an indefinite-reinvestment designation, as described below.
We typically fund the cash requirements of our operations in the United States through intercompany dividends, intercompany loans and intercompany charges for products, use of intangible property, and corporate services. However, some markets impose government-approval or other requirements for the repatriation of dividends. For example, in Mainland China, we are unable to repatriate cash from current operations in the form of dividends until we file the necessary statutory financial statements for the relevant period. As of December 31, 20192022 and 2018,2021, we had $76.6$33.4 million and $122.9$50.3 million, respectively, in cash denominated in Chinese RMB. We also have experienced delays in repatriating cash from Argentina. As of December 31, 2022 and 2021, we had $14.9 million and $11.3 million, respectively, in intercompany receivable with our Argentina subsidiary. We also have intercompany loan arrangements with some of our markets, including Mainland China, that allow us to access available cash, subject to certain limits in Mainland China and other jurisdictions. We also have drawn on our revolving line of credit to address cash needs until we can repatriate cash from Mainland China or other markets, and we may continue to do so. Except for $60 million of earnings in Mainland China that we designated as indefinitely reinvested during the second quarter of 2018, we currently plan to repatriate undistributed earnings from our non-U.S. operations as necessary, considering the cash needs of our non-U.S. operations and the cash needs of our U.S. operations for dividends, stock repurchases, capital investments, debt repayment and strategic transactions. Repatriation of non-U.S. earnings is subject to withholding taxes in certain foreign jurisdictions. Accordingly, we have accrued the necessary withholding taxes related to the non-U.S. earnings.
We currently believe that existing cash balances, future cash flows from operations and existing lines of credit will be adequate to fund our cash needs on both a short- and long-term basis. The majority of our historical expenses have been variable in nature and as such, a potential reduction in the level of revenue would reduce our cash flow needs. In the event that our current cash balances, future cash flow from operations and current lines of credit are not sufficient to meet our obligations or strategic needs, we would consider raising additional funds in the debt or equity markets or restructuring our current debt obligations. Additionally, we would consider realigning our strategic plans, including a reduction in capital spending, stock repurchases or dividend payments.
Non-GAAP Financial Measures
Constant-currency revenue change is a non-GAAP financial measure that removes the impact of fluctuations in foreign-currency exchange rates, thereby facilitating period-to-period comparisons of the Company’s performance. It is calculated by translating the current period’s revenue at the same average exchange rates in effect during the applicable prior-year period and then comparing that amount to the prior-year period’s revenue. We believe that constant-currency revenue change is useful to investors, lenders, and analysts because such information enables them to gauge the impact of foreign-currency fluctuations on our revenue from period to period.
| Total | 2020 | 2021 - 2022 | 2023 - 2024 | Thereafter | ||||||||||||||||
Long-term debt obligations(1) | $ | 365,000 | $ | 27,500 | $ | 67,500 | $ | 270,000 | — | |||||||||||
| Interest payable | 37,822 | 12,625 | 22,032 | 3,165 | — | |||||||||||||||
| Operating lease obligations | 170,502 | 45,942 | 62,367 | 30,825 | 31,368 | |||||||||||||||
| Purchase obligations | 289,776 | 209,222 | 73,258 | 7,238 | 58 | |||||||||||||||
Other long-term liabilities reflected on the balance sheet(2) | 96,795 | 4,098 | 7,155 | 6,573 | 78,969 | |||||||||||||||
| Total | $ | 959,895 | $ | 299,387 | $ | 232,312 | $ | 317,801 | $ | 110,395 | ||||||||||
Contingent Liabilities
Please refer to Note 1916 to the consolidated financial statements contained in this report for information regarding our contingent liabilities.
Seasonality and Cyclicality
In addition to general economic factors, we are impacted by seasonal factors and trends such as major cultural events and vacation patterns. For example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a negative impact on that quarter. We believe that direct selling is also generally negatively impacted during the third quarter, when many individuals, including our sales force, traditionally take vacations.
Prior to making a key product generally available for purchase in a market, we often do one or more introductory offerings of the product, such as a preview of the product to our Sales Leaders a limited-time offer, or other product introduction or promotion. These offerings maysometimes generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue, Sales Leaders, Paid Affiliates and/or Customers during the quarter and can skew year-over-year and sequential comparisons.
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2017 | ||||||||||||||||||||||
| Customers | Sales Leaders | Customers | Sales Leaders | Customers | Sales Leaders | |||||||||||||||||||
| Mainland China | 292,812 | 17,987 | 303,789 | 33,129 | 192,604 | 40,610 | ||||||||||||||||||
| Americas/Pacific | 220,216 | 7,607 | 248,609 | 8,354 | 244,467 | 8,871 | ||||||||||||||||||
| South Korea | 168,972 | 7,251 | 182,026 | 7,565 | 172,553 | 8,431 | ||||||||||||||||||
| Southeast Asia | 136,349 | 7,480 | 153,465 | 8,933 | 121,764 | 8,020 | ||||||||||||||||||
| Japan | 125,557 | 5,916 | 130,181 | 5,916 | 132,041 | 6,592 | ||||||||||||||||||
| EMEA | 153,330 | 4,619 | 149,085 | 4,791 | 135,051 | 4,683 | ||||||||||||||||||
| Hong Kong/Taiwan | 65,669 | 3,900 | 76,891 | 4,767 | 71,091 | 4,671 | ||||||||||||||||||
| Total | 1,162,905 | 54,760 | 1,244,046 | 73,455 | 1,069,571 | 81,878 | ||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||
4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | 4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | |||||||||||||||||||||||||
| Revenue | $ | 583.4 | $ | 589.9 | $ | 623.5 | $ | 623.6 | $ | 683.3 | $ | 675.3 | $ | 704.2 | $ | 616.2 | ||||||||||||||||
| Gross profit | 442.8 | 449.8 | 469.5 | 477.0 | 521.4 | 517.9 | 535.6 | 469.9 | ||||||||||||||||||||||||
| Operating income | 54.7 | 69.9 | 74.2 | 68.7 | 18.4 | 80.7 | 82.8 | 59.0 | ||||||||||||||||||||||||
| Net income | 40.1 | 44.1 | 46.3 | 43.0 | (17.8 | ) | 53.1 | 51.0 | 35.5 | |||||||||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||||||||
| Basic | 0.72 | 0.79 | 0.83 | 0.78 | (0.32 | ) | 0.99 | 0.92 | 0.66 | |||||||||||||||||||||||
| Diluted | 0.72 | 0.79 | 0.83 | 0.77 | (0.32 | ) | 0.94 | 0.90 | 0.64 | |||||||||||||||||||||||
Recent Accounting Pronouncements
A description of new accounting pronouncements is contained in Note 2 of the Notes to Consolidated Financial Statements.consolidated financial statements contained in this report.
Currency Risk and Exchange Rate Information
A majority of our revenue and many of our expenses are recognized outside of the United States, except for inventory purchases, a significant portion of which are primarily transacted in U.S. dollars from vendors in the United States. The local currency of each of our Subsidiaries’ primary markets is considered the functional currency with the exception of our Asia product-distribution subsidiary in Singapore and, as discussed below, our subsidiary in Argentina. All revenue and expenses are translated at weighted-average exchange rates for the periods reported. Therefore, our reported revenue and earnings will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. These impacts may be significant because a large portion of our business is derived from outside of the United States. Given the uncertainty of exchange rate fluctuations, it is difficult to predict the effect of these fluctuations on our future business, product pricing and results of operations or financial condition.
In the second quarter of 2018, published inflation indices indicated that the three-year cumulative inflation in Argentina exceeded 100%, and as of July 1, 2018, we elected to adopt highly inflationary accounting for our subsidiariessubsidiary in Argentina. Under highly inflationary accounting, Argentina’s functional currency became the U.S. dollar, and its income statement and balance sheet have been measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on peso-denominated monetary assets and liabilities has been reflected in earnings in Other income (expense), net and was not material. As of December 31, 2019,2022, our Argentina subsidiary had a small net peso monetary position. Net sales of Argentina were less than 2% of our consolidated net sales for 2019, 20182022, 2021 and 2017.2020.
We may seek to reduce our exposure to fluctuations in foreign currency exchange rates through the use of foreign currency exchange contracts and through intercompany loans of foreign currency. We do not use derivative financial instruments for trading or speculative purposes. We regularly monitor our foreign currency risks and periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results. As of December 31, 2019,2022, and 2018,2021, we did not hold non-designated mark-to-market forward derivative contracts to hedge foreign-denominated intercompany positions or third-party foreign debt. As of December 31, 20192022 and 2018,2021, we did not hold any forward contracts designated as foreign-currency cash flow hedges. We continue to evaluate our foreign currency hedging policy.
Following are the weighted-average currency exchange rates of U.S. $1 into local currency for each of our international or foreign markets in which revenue exceeded U.S. $5.0 million for at least one of the quarters listed:
| 2019 | 2018 | |||||||||||||||||||||||||||||||
4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | 4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | |||||||||||||||||||||||||
| Argentina | 59.4 | 49.6 | 43.9 | 38.9 | 37.1 | 31.1 | 23.0 | 19.7 | ||||||||||||||||||||||||
| Australia | 1.5 | 1.5 | 1.4 | 1.4 | 1.4 | 1.4 | 1.3 | 1.3 | ||||||||||||||||||||||||
| Canada | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | ||||||||||||||||||||||||
| Eurozone countries | 0.9 | 0.9 | 0.9 | 0.9 | 0.9 | 0.9 | 0.8 | 0.8 | ||||||||||||||||||||||||
| Hong Kong | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | ||||||||||||||||||||||||
| Indonesia | 14,056 | 14,114 | 14,263 | 14,137 | 14,763 | 14,620 | 13,961 | 13,577 | ||||||||||||||||||||||||
| Japan | 108.7 | 107.3 | 109.9 | 110.2 | 112.8 | 111.5 | 109.2 | 108.2 | ||||||||||||||||||||||||
| Mainland China | 7.0 | 7.0 | 6.8 | 6.7 | 6.9 | 6.8 | 6.4 | 6.4 | ||||||||||||||||||||||||
| Malaysia | 4.2 | 4.2 | 4.1 | 4.1 | 4.2 | 4.1 | 4.0 | 3.9 | ||||||||||||||||||||||||
| Philippines | 51.0 | 51.8 | 52.0 | 52.4 | 53.2 | 53.5 | 52.5 | 51.6 | ||||||||||||||||||||||||
| Singapore | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.3 | 1.3 | ||||||||||||||||||||||||
| South Korea | 1,175.0 | 1,194.4 | 1,165.8 | 1,125.0 | 1,128.3 | 1,121.1 | 1,080.4 | 1,072.7 | ||||||||||||||||||||||||
| Taiwan | 30.4 | 31.2 | 31.1 | 30.8 | 30.8 | 30.7 | 29.7 | 29.3 | ||||||||||||||||||||||||
| Thailand | 30.3 | 30.7 | 31.6 | 31.6 | 32.8 | 33.0 | 32.0 | 31.6 | ||||||||||||||||||||||||
| Vietnam | 23,191 | 23,213 | 23,314 | 23,201 | 23,318 | 23,237 | 22,808 | 22,740 | ||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||
4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | 4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | |||||||||||||||||||||||||
| Argentina | 162.6 | 136.8 | 118.6 | 107.0 | 100.5 | 97.4 | 93.9 | 88.8 | ||||||||||||||||||||||||
| Australia | 1.5 | 1.5 | 1.4 | 1.4 | 1.4 | 1.4 | 1.3 | 1.3 | ||||||||||||||||||||||||
| Canada | 1.4 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.2 | 1.3 | ||||||||||||||||||||||||
| Colombia | 4,826.4 | 4,379.4 | 3,929.8 | 3,891.6 | 3,882.7 | 3,840.4 | 3,690.7 | 3,560.4 | ||||||||||||||||||||||||
| Chile | 915.8 | 930.6 | 840.9 | 809.1 | 827.4 | 773.6 | 716.8 | 724.0 | ||||||||||||||||||||||||
| Eurozone countries | 1.0 | 1.0 | 0.9 | 0.9 | 0.9 | 0.8 | 0.8 | 0.8 | ||||||||||||||||||||||||
| Hong Kong | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | ||||||||||||||||||||||||
| Indonesia | 15,553 | 14,933 | 14,536 | 14,344 | 14,274 | 14,373 | 14,393 | 14,202 | ||||||||||||||||||||||||
| Japan | 140.8 | 138.1 | 129.5 | 116.2 | 113.6 | 110.1 | 109.5 | 106.0 | ||||||||||||||||||||||||
| Mainland China | 7.1 | 6.8 | 6.6 | 6.3 | 6.4 | 6.5 | 6.5 | 6.5 | ||||||||||||||||||||||||
| Malaysia | 4.6 | 4.5 | 4.3 | 4.2 | 4.2 | 4.2 | 4.1 | 4.1 | ||||||||||||||||||||||||
| Mexico | 19.7 | 20.2 | 20.0 | 20.5 | 20.7 | 20.0 | 20.0 | 20.4 | ||||||||||||||||||||||||
| Philippines | 57.2 | 56.3 | 52.7 | 51.6 | 50.4 | 50.2 | 48.2 | 48.3 | ||||||||||||||||||||||||
| Singapore | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.3 | 1.3 | ||||||||||||||||||||||||
| South Africa | 17.6 | 17.0 | 15.5 | 15.2 | 15.4 | 14.6 | 14.1 | 15.0 | ||||||||||||||||||||||||
| South Korea | 1,358.2 | 1,342.2 | 1,262.1 | 1,206.2 | 1,183.8 | 1,159.7 | 1,121.2 | 1,115.3 | ||||||||||||||||||||||||
| Taiwan | 31.1 | 30.4 | 29.4 | 28.0 | 27.8 | 27.9 | 28.0 | 28.1 | ||||||||||||||||||||||||
| Thailand | 36.2 | 36.4 | 34.5 | 33.0 | 33.3 | 32.9 | 31.4 | 30.3 | ||||||||||||||||||||||||
| Vietnam | 24,303 | 23,463 | 23,081 | 22,770 | 22,780 | 22,889 | 23,041 | 23,052 | ||||||||||||||||||||||||
Interest Rate Risk
We are exposed to risks related to fluctuations in interest rates on our outstanding variable rate debt. As of December 31, 2022, we had $402.5 million outstanding on the term loan, net of unamortized debt issuance cost and outstanding borrowings on our revolving credit facility. Our four interest rate swaps reduce our exposure to interest rate risk on our term loan by $200.0 million as of December 31, 2022. As a result, the total variable debt of $202.5 million was exposed to market risks as of December 31, 2022. A hypothetical one percentage point increase (decrease) in interest rates on our variable rate debt would increase (decrease) our annual interest expense by approximately $2.0 million.
For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. We have not entered into and currently do not hold derivatives for trading or speculative purposes.
For additional information required by Item 7A of Form 10-K is incorporated herein by reference from the information contained in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—“Currency Risk and Exchange Rate Information” andabout our market risk see Note 14 to the consolidated financial statements contained in this report.
| 1. | Financial Statements. Set forth below is the index to the Financial Statements included in this Item 8: |
| Page | |
Consolidated Balance Sheets at December 31 | |
Consolidated Statements of Income for the years ended December 31, | |
Consolidated Statements of Comprehensive Income for the years ended December 31, | |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, | |
Consolidated Statements of Cash Flows for the years ended December 31, | |
| 2. | Financial Statement Schedules: Financial statement schedules have been omitted because they are not required or are not applicable, or because the required information is shown in the financial statements or notes thereto. |
NU SKIN ENTERPRISES, INC.
(U.S. dollars in thousands)
| December 31, | December 31, | |||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash and cash equivalents | $ | 335,630 | $ | 386,911 | $ | 264,725 | $ | 339,593 | ||||||||
| Current investments | 8,413 | 11,346 | 13,784 | 15,221 | ||||||||||||
| Accounts receivable | 50,378 | 53,282 | ||||||||||||||
| Accounts receivable, net | 47,360 | 41,299 | ||||||||||||||
| Inventories, net | 275,891 | 295,821 | 346,183 | 399,931 | ||||||||||||
| Prepaid expenses and other | 69,854 | 51,877 | 87,816 | 76,906 | ||||||||||||
| Total current assets | 740,166 | 799,237 | 759,868 | 872,950 | ||||||||||||
| Property and equipment, net | 453,604 | 464,535 | 444,806 | 453,674 | ||||||||||||
| Right-of-use assets | 144,326 | — | ||||||||||||||
| Operating lease right-of-use assets | 98,734 | 120,973 | ||||||||||||||
| Goodwill | 196,573 | 196,573 | 206,432 | 206,432 | ||||||||||||
| Other intangible assets, net | 80,321 | 89,989 | 66,701 | 76,991 | ||||||||||||
| Other assets | 154,016 | 144,112 | 244,429 | 175,460 | ||||||||||||
| Total assets | $ | 1,769,006 | $ | 1,694,446 | $ | 1,820,970 | $ | 1,906,480 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities | ||||||||||||||||
| Accounts payable | $ | 38,979 | $ | 47,617 | $ | 53,963 | $ | 49,993 | ||||||||
| Accrued expenses | 290,281 | 322,583 | 280,280 | 372,201 | ||||||||||||
| Current portion of long-term debt | 27,500 | 69,455 | 25,000 | 107,500 | ||||||||||||
| Total current liabilities | 356,760 | 439,655 | 359,243 | 529,694 | ||||||||||||
| Operating lease liabilities | 105,701 | — | 76,540 | 88,759 | ||||||||||||
| Long-term debt | 334,461 | 361,008 | 377,466 | 268,781 | ||||||||||||
| Other liabilities | 96,795 | 111,916 | 110,425 | 106,474 | ||||||||||||
| Total liabilities | 893,717 | 912,579 | 923,674 | 993,708 | ||||||||||||
| Commitments and contingencies (Notes 7 and 19) | ||||||||||||||||
| Commitments and contingencies (Notes 7 and 16) | ||||||||||||||||
| Stockholders’ equity | ||||||||||||||||
| Class A common stock – 500 million shares authorized, $0.001 par value, 90.6 million shares issued | 91 | 91 | ||||||||||||||
Class A common stock – 500 million shares authorized, $0.001 par value, 90.6 million shares issued | 91 | 91 | ||||||||||||||
| Additional paid-in capital | 557,544 | 552,564 | 613,278 | 601,703 | ||||||||||||
| Treasury stock, at cost – 35.0 million and 35.2 million shares | (1,324,826 | ) | (1,326,605 | ) | ||||||||||||
Treasury stock, at cost – 41.1 million and 40.7 million shares | (1,569,061 | ) | (1,526,860 | ) | ||||||||||||
| Accumulated other comprehensive loss | (85,292 | ) | (79,934 | ) | (86,509 | ) | (73,896 | ) | ||||||||
| Retained earnings | 1,727,772 | 1,635,751 | 1,939,497 | 1,911,734 | ||||||||||||
| Total stockholders’ equity | 875,289 | 781,867 | 897,296 | 912,772 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,769,006 | $ | 1,694,446 | $ | 1,820,970 | $ | 1,906,480 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NU SKIN ENTERPRISES, INC.
(U.S. dollars in thousands, except per share amounts)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Revenue | $ | 2,420,416 | $ | 2,679,008 | $ | 2,279,099 | $ | 2,225,659 | $ | 2,695,669 | $ | 2,581,934 | ||||||||||||
| Cost of sales | 581,420 | 634,140 | 502,078 | 630,915 | 675,223 | 658,028 | ||||||||||||||||||
| Gross profit | 1,838,996 | 2,044,868 | 1,777,021 | 1,594,744 | 2,020,446 | 1,923,906 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | 955,600 | 1,071,020 | 938,024 | 879,634 | 1,080,153 | 1,029,869 | ||||||||||||||||||
| General and administrative expenses | 615,970 | 662,302 | 564,514 | 555,769 | 654,431 | 636,473 | ||||||||||||||||||
| Restructuring and impairment expenses | — | 70,686 | — | 48,494 | 51,870 | — | ||||||||||||||||||
| Total operating expenses | 1,571,570 | 1,804,008 | 1,502,538 | 1,483,897 | 1,786,454 | 1,666,342 | ||||||||||||||||||
| Operating income | 267,426 | 240,860 | 274,483 | 110,847 | 233,992 | 257,564 | ||||||||||||||||||
| Other income (expense), net (Note 20) | (12,254 | ) | (21,194 | ) | (8,916 | ) | ||||||||||||||||||
| Other income (expense), net (Note 17) | (21,877 | ) | (1,533 | ) | (1,332 | ) | ||||||||||||||||||
| Income before provision for income taxes | 255,172 | 219,666 | 265,567 | 88,970 | 232,459 | 256,232 | ||||||||||||||||||
| Provision for income taxes | 81,619 | 97,779 | 136,130 | |||||||||||||||||||||
| Provision (benefit) for income taxes | (15,808 | ) | 85,193 | 64,877 | ||||||||||||||||||||
| Net income | $ | 173,553 | $ | 121,887 | $ | 129,437 | $ | 104,778 | $ | 147,266 | $ | 191,355 | ||||||||||||
| Net income per share: | ||||||||||||||||||||||||
| Basic | $ | 3.13 | $ | 2.21 | $ | 2.45 | $ | 2.10 | $ | 2.93 | $ | 3.66 | ||||||||||||
| Diluted | $ | 3.10 | $ | 2.16 | $ | 2.36 | $ | 2.07 | $ | 2.86 | $ | 3.63 | ||||||||||||
| Weighted-average common shares outstanding (000s): | ||||||||||||||||||||||||
| Basic | 55,518 | 55,170 | 52,806 | 50,002 | 50,193 | 52,296 | ||||||||||||||||||
| Diluted | 55,927 | 56,476 | 54,852 | 50,525 | 51,427 | 52,765 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NU SKIN ENTERPRISES, INC.
(U.S. dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net income | $ | 173,553 | $ | 121,887 | $ | 129,437 | ||||||
| Other comprehensive income: | ||||||||||||
| Foreign currency translation adjustment, net of taxes of $(467), $2,275, and $(8,056) respectively | (5,358 | ) | (13,474 | ) | 18,264 | |||||||
| Net unrealized gains/(losses) on foreign currency cash flow hedges, net of taxes of $—, $18 and $84, respectively | — | (160 | ) | (152 | ) | |||||||
| Less: Reclassification adjustment for realized losses/(gains) in current earnings, net of taxes of $—, $(2), and $169, respectively | — | 18 | (308 | ) | ||||||||
| (5,358 | ) | (13,616 | ) | 17,804 | ||||||||
| Comprehensive income | $ | 168,195 | $ | 108,271 | $ | 147,241 | ||||||
| Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Net income | $ | 104,778 | $ | 147,266 | $ | 191,355 | ||||||
| Other comprehensive income (loss): | ||||||||||||
Foreign currency translation adjustment, net of taxes of $536, $429, and $(299), respectively | (22,918 | ) | (13,476 | ) | 19,708 | |||||||
Net unrealized gains/(losses) on cash flow hedges, net of taxes of $(3,519), $(1,166) and $(220), respectively | 12,748 | 4,225 | 797 | |||||||||
Less: Reclassification adjustment for realized losses/(gains) in current earnings on cash flow hedges, net of taxes of $674, $(34), and $(5), respectively | (2,443 | ) | 123 | 19 | ||||||||
| (12,613 | ) | (9,128 | ) | 20,524 | ||||||||
| Comprehensive income | $ | 92,165 | $ | 138,138 | $ | 211,879 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
NU SKIN ENTERPRISES, INC.
(U.S. dollars in thousands)
Class A Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Total | Class A Common Stock | Additional Paid-in Capital | Treasury Stock, at cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total | |||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2017 | $ | 91 | $ | 439,635 | $ | (1,250,123 | ) | $ | (84,122 | ) | $ | 1,558,589 | $ | 664,070 | ||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | 91 | $ | 557,544 | $ | (1,324,826 | ) | $ | (85,292 | ) | $ | 1,727,772 | $ | 875,289 | ||||||||||||||||||||||||||||||||||
| Cumulative effect adjustment from adoption of ASU 2016-09 | — | 2,800 | — | — | (2,800 | ) | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 129,437 | 129,437 | — | — | — | — | 191,355 | 191,355 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 17,804 | — | 17,804 | — | — | — | 20,524 | — | 20,524 | ||||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock (Note 8) | — | — | (71,731 | ) | — | — | (71,731 | ) | — | — | (144,334 | ) | — | — | (144,334 | ) | ||||||||||||||||||||||||||||||||
| Exercise of employee stock options (1.2 million shares)/vesting of stock awards | — | 9,479 | 14,964 | — | — | 24,443 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 19,314 | — | — | — | 19,314 | ||||||||||||||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | — | (11,067 | ) | — | — | — | (11,067 | ) | ||||||||||||||||||||||||||||||||||||||||
| Acquisition of equity method investment (0.2 million shares) | — | 6,188 | 2,196 | — | — | 8,384 | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (76,058 | ) | (76,058 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | $ | 91 | $ | 466,349 | $ | (1,304,694 | ) | $ | (66,318 | ) | $ | 1,609,168 | $ | 704,596 | ||||||||||||||||||||||||||||||||||
| Cumulative effect adjustment from adoption of ASC 606 | — | — | — | — | (13,042 | ) | (13,042 | ) | ||||||||||||||||||||||||||||||||||||||||
| Cumulative effect adjustment from adoption of ASU 2018-02 | — | — | — | — | (1,681 | ) | (1,681 | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 121,887 | 121,887 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | (13,616 | ) | — | (13,616 | ) | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock (Note 8) | — | — | (69,565 | ) | — | — | (69,565 | ) | ||||||||||||||||||||||||||||||||||||||||
| Exercise of employee stock options (0.5 million shares)/vesting of stock awards | — | 2,804 | 7,973 | — | — | 10,777 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 26,609 | — | — | — | 26,609 | ||||||||||||||||||||||||||||||||||||||||||
| Business Acquisitions (1.5 million shares) | — | 80,064 | 19,794 | — | — | 99,858 | ||||||||||||||||||||||||||||||||||||||||||
| Equity component of convertible note settlement (net) | — | (23,262 | ) | 19,887 | — | — | (3,375 | ) | ||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (80,581 | ) | (80,581 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | 91 | $ | 552,564 | $ | (1,326,605 | ) | $ | (79,934 | ) | $ | 1,635,751 | $ | 781,867 | ||||||||||||||||||||||||||||||||||
| Cumulative effect adjustment from adoption of ASC Topic 842 | — | — | — | — | 657 | 657 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 173,553 | 173,553 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | (5,358 | ) | — | (5,358 | ) | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock (Note 8) | — | — | (825 | ) | — | — | (825 | ) | ||||||||||||||||||||||||||||||||||||||||
| Exercise of employee stock options (— million shares)/vesting of stock awards | — | (4,929 | ) | 2,604 | — | — | (2,325 | ) | ||||||||||||||||||||||||||||||||||||||||
Exercise of employee stock options (0.4 million shares)/vesting of stock awards | — | (1,803 | ) | 7,567 | — | — | 5,764 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 9,909 | — | — | — | 9,909 | — | 24,060 | — | — | — | 24,060 | ||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (82,189 | ) | (82,189 | ) | — | — | — | — | (78,387 | ) | (78,387 | ) | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 91 | $ | 557,544 | $ | (1,324,826 | ) | $ | (85,292 | ) | $ | 1,727,772 | $ | 875,289 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | 91 | $ | 579,801 | $ | (1,461,593 | ) | $ | (64,768 | ) | $ | 1,840,740 | $ | 894,271 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 147,266 | 147,266 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (9,128 | ) | — | (9,128 | ) | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock (Note 8) | — | — | (80,420 | ) | — | — | (80,420 | ) | ||||||||||||||||||||||||||||||||||||||||
Exercise of employee stock options (0.7 million shares)/vesting of stock awards | — | (1,292 | ) | 15,153 | — | — | 13,861 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 23,194 | — | — | — | 23,194 | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (76,272 | ) | (76,272 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | 91 | $ | 601,703 | $ | (1,526,860 | ) | $ | (73,896 | ) | $ | 1,911,734 | $ | 912,772 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 104,778 | 104,778 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (12,613 | ) | — | (12,613 | ) | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock (Note 8) | — | — | (70,045 | ) | — | — | (70,045 | ) | ||||||||||||||||||||||||||||||||||||||||
Exercise of employee stock options (1.2 million shares)/vesting of stock awards | — | (792 | ) | 27,844 | — | — | 27,052 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 12,367 | — | — | — | 12,367 | ||||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (77,015 | ) | (77,015 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | $ | 91 | $ | 613,278 | $ | (1,569,061 | ) | $ | (86,509 | ) | $ | 1,939,497 | $ | 897,296 | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NU SKIN ENTERPRISES, INC.
(U.S. dollars in thousands)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||||||
| Net income | $ | 173,553 | $ | 121,887 | $ | 129,437 | $ | 104,778 | $ | 147,266 | $ | 191,355 | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
| Depreciation and amortization | 76,650 | 83,003 | 71,564 | 72,506 | 76,320 | 73,991 | ||||||||||||||||||
| Impairment of fixed assets | — | 48,551 | — | |||||||||||||||||||||
| Equity method earnings | — | (456 | ) | (1,048 | ) | |||||||||||||||||||
| Gain on step acquisition | — | (13,644 | ) | — | ||||||||||||||||||||
| Loss on extinguishment of debt | — | 7,220 | — | |||||||||||||||||||||
| Non-cash lease expense | 44,518 | 48,704 | 46,163 | |||||||||||||||||||||
| Stock-based compensation | 12,367 | 23,194 | 24,060 | |||||||||||||||||||||
| Foreign currency (gains)/losses | 3,829 | 16,381 | (3,014 | ) | 8,245 | 7,056 | (287 | ) | ||||||||||||||||
| Stock-based compensation | 9,909 | 26,609 | 19,314 | |||||||||||||||||||||
| Loss on disposal of assets | 33 | 13,026 | 3,209 | |||||||||||||||||||||
| Impairment of fixed assets and other intangibles | 9,916 | 31,892 | — | |||||||||||||||||||||
Unrealized (gain)/losses on equity investments | — | (18,077 | ) | — | ||||||||||||||||||||
| Deferred taxes | 1,965 | (14,929 | ) | 39,213 | (51,626 | ) | 5,821 | (11,914 | ) | |||||||||||||||
| Non-cash lease expense | 44,460 | — | — | |||||||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||||||
| Accounts receivable | 2,746 | (10,453 | ) | (103 | ) | |||||||||||||||||||
| Accounts receivable, net | (11,449 | ) | 20,219 | (11,207 | ) | |||||||||||||||||||
| Inventories, net | 18,446 | (33,371 | ) | 7,537 | 40,314 | (95,320 | ) | (31,137 | ) | |||||||||||||||
| Prepaid expenses and other | (17,435 | ) | (1,536 | ) | 14,250 | 2,758 | 15,132 | (153 | ) | |||||||||||||||
| Other assets | (67,109 | ) | 887 | (11,658 | ) | 3,099 | (19,792 | ) | (31,616 | ) | ||||||||||||||
| Accounts payable | (7,184 | ) | (9,164 | ) | 6,834 | 9,263 | (13,279 | ) | 24,836 | |||||||||||||||
| Accrued expenses | (86,997 | ) | (7,433 | ) | 22,490 | (120,833 | ) | (104,992 | ) | 87,452 | ||||||||||||||
| Other liabilities | 25,098 | (10,814 | ) | 7,739 | (15,827 | ) | 4,412 | 14,389 | ||||||||||||||||
| Net cash provided by operating activities | 177,931 | 202,738 | 302,555 | 108,062 | 141,582 | 379,141 | ||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||||||
| Purchases of property and equipment | (66,067 | ) | (70,371 | ) | (60,156 | ) | (59,056 | ) | (68,615 | ) | (63,823 | ) | ||||||||||||
| Proceeds on investment sales | 11,160 | 11,536 | 11,269 | 5,932 | 15,094 | 14,037 | ||||||||||||||||||
| Purchases of investments | (8,432 | ) | (11,420 | ) | (11,332 | ) | (13,955 | ) | (16,242 | ) | (14,693 | ) | ||||||||||||
| Acquisitions (net of cash acquired) | (8,073 | ) | (38,506 | ) | (31,745 | ) | — | (18,963 | ) | (14,949 | ) | |||||||||||||
| Net cash used in investing activities | (71,412 | ) | (108,761 | ) | (91,964 | ) | (67,079 | ) | (88,726 | ) | (79,428 | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||||||
Exercise of employee stock options and taxes paid related to the net shares settlement of stock awards | 27,052 | 13,861 | 5,764 | |||||||||||||||||||||
| Payment of cash dividends | (82,189 | ) | (80,581 | ) | (76,058 | ) | (77,015 | ) | (76,272 | ) | (78,387 | ) | ||||||||||||
| Repurchase of shares of common stock | (825 | ) | (69,565 | ) | (71,731 | ) | (70,045 | ) | (80,420 | ) | (144,334 | ) | ||||||||||||
| Exercise of employee stock options and taxes paid related to the net shares settlement of stock awards | (2,325 | ) | 10,777 | 24,443 | ||||||||||||||||||||
| Payments on long-term debt | (214,455 | ) | (552,500 | ) | (103,226 | ) | ||||||||||||||||||
| Payment of debt issuance costs | — | (7,243 | ) | — | ||||||||||||||||||||
| Proceeds from long-term debt | 145,000 | 582,398 | 67,000 | |||||||||||||||||||||
| Finance lease principal payments | (1,919 | ) | (1,871 | ) | (709 | ) | ||||||||||||||||||
Payment of debt issuance cost | (5,077 | ) | — | — | ||||||||||||||||||||
| Payments on debt | (432,500 | ) | (115,000 | ) | (142,500 | ) | ||||||||||||||||||
| Proceeds from debt | 460,000 | 155,000 | 115,000 | |||||||||||||||||||||
| Net cash used in financing activities | (154,794 | ) | (116,714 | ) | (159,572 | ) | (99,504 | ) | (104,702 | ) | (245,166 | ) | ||||||||||||
| Effect of exchange rate changes on cash | (3,006 | ) | (16,751 | ) | 18,134 | (16,347 | ) | (11,244 | ) | 12,506 | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (51,281 | ) | (39,488 | ) | 69,153 | (74,868 | ) | (63,090 | ) | 67,053 | ||||||||||||||
| Cash and cash equivalents, beginning of period | 386,911 | 426,399 | 357,246 | 339,593 | 402,683 | 335,630 | ||||||||||||||||||
| Cash and cash equivalents, end of period | $ | 335,630 | $ | 386,911 | $ | 426,399 | $ | 264,725 | $ | 339,593 | $ | 402,683 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NU SKIN ENTERPRISES, INC.
| 1. | The Company |
Nu Skin Enterprises, Inc. (the “Company”) is a holding company, with Nu Skin a leading global direct selling company, being the primary operating unit. Nu Skin develops and distributes premium-quality, innovative personal care productsbeauty and wellness products that are sold worldwide under the Nu Skin, Pharmanex and ageLOC brands and a small number of other products and services. The Company reports revenue from 9nine segments, consisting of its 7seven geographic Nu Skin segments—segments—Americas, which includes Canada, Latin America and the United States; Mainland China; South Korea; Southeast Asia,Asia/Pacific, which includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam; Americas/Pacific, which includesVietnam, Australia, Canada, Latin America, New Zealand, and the United States;other markets; South Korea; Japan; Hong Kong/Taiwan, which also includes Macau; and Europe, Middle East and Africa (“EMEA”), which includes several markets in Europe as well as Israel Russia and South AfricaAfrica; and Hong Kong/Taiwan, which also includes Macau—and—its two Rhyz Investments segments—Manufacturing, segment, which includes the manufacturing and packaging subsidiaries it acquired in the first quarter of 2018;has acquired; and Rhyz other, which includes other investments by its Grow Tech segment, which focuses on developing controlled-environment agriculture technologiesRhyz strategic investment arm (the Company’s subsidiaries operating within each segment are collectively referred to as the “Subsidiaries”).
| 2. | Summary of Significant Accounting Policies |
Consolidation
The consolidated financial statements include the accounts of the Company and the Subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Use of estimates
The preparation of these financial statements, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), required management to make estimates and assumptions that affected the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current presentation. The Company reclassified $12.0 million and $10.4 million of events and other miscellaneous selling costs from the general and administration expenses line to the sellingexpenses line on the consolidated statement of income for the years ended December 31, 2021 and 2020, respectively. The Company believes these costs are better reflected in selling expenses. The reclassification had no impact on operating income for the years ended December 31, 2021 and 2020.
Cash and cash equivalents
Cash equivalents are short-term, highly liquid instruments with original maturities of 90 days or less.
Accounts receivable
Accounts receivable represents amounts owed to us through our operating activities and are presented net of allowance for doubtful accounts. Accounts receivable for core Nu Skin consists primarily of credit card receivables, while accounts receivable for our Rhyz investments consists primarily of trade receivables from customer sales. For the Company’s trade receivables from its Rhyz investment customers, the Company performs ongoing credit evaluations of its customers and maintains an allowance for expected credit losses. The allowance for expected credit losses represents the Company’s best estimate based on current and historical information, and reasonable and supportable forecasts of future events and circumstances.
Inventories
Inventories consist primarily of merchandise purchased for resale and are stated at the lower of standard cost or net realizable value, using a standard cost method which approximates the first-in, first-out method. The Company had reserves of its inventory carrying value totaling $12.3$37.3 million and $14.1$18.6 million as of December 31, 20192022 and 2018,2021, respectively.
Inventories consist of the following (U.S. dollars in thousands):
| December 31, | December 31, | |||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Raw materials | $ | 87,942 | $ | 91,610 | $ | 163,797 | $ | 179,891 | ||||||||
| Finished goods | 187,949 | 204,211 | 182,386 | 220,040 | ||||||||||||
| Total inventory, net | $ | 275,891 | $ | 295,821 | $ | 346,183 | $ | 399,931 | ||||||||
Reserves of inventories consist of the following (U.S. dollars in thousands):
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Beginning balance | $ | 14,149 | $ | 8,081 | $ | 7,995 | $ | 18,643 | $ | 14,249 | $ | 12,295 | ||||||||||||
| Additions | 14,931 | 23,940 | 16,382 | 43,286 | 31,300 | 15,952 | ||||||||||||||||||
| Write-offs | (16,785 | ) | (17,872 | ) | (16,296 | ) | (24,662 | ) | (26,906 | ) | (13,998 | ) | ||||||||||||
| Ending balance | $ | 12,295 | $ | 14,149 | $ | 8,081 | $ | 37,267 | $ | 18,643 | $ | 14,249 | ||||||||||||
Prepaid expensesexpense and other
Prepaid expenses and other consist of the following (U.S. dollars in thousands):
| December 31, | December 31, | |||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Deferred charges | $ | 8,142 | $ | 6,703 | $ | 11,748 | $ | 14,266 | ||||||||
| Prepaid income tax | 8,905 | — | 9,333 | 2,784 | ||||||||||||
| Prepaid inventory and import costs | 4,277 | 2,808 | 3,540 | 6,087 | ||||||||||||
| Prepaid rent, insurance and other occupancy costs | 12,516 | 8,799 | 5,830 | 3,690 | ||||||||||||
| Prepaid promotion and event cost | 7,159 | 6,013 | 2,395 | 4,382 | ||||||||||||
| Prepaid other taxes | 7,965 | 6,268 | 8,768 | 9,333 | ||||||||||||
| Derivative financial instruments | 9,156 | 557 | ||||||||||||||
| Prepaid software license | 3,317 | 4,006 | 17,463 | 17,041 | ||||||||||||
| Deposits | 1,208 | 1,470 | 1,153 | 1,158 | ||||||||||||
| Other | 16,365 | 15,810 | 18,430 | 17,608 | ||||||||||||
| Total prepaid expenses and other | $ | 69,854 | $ | 51,877 | ||||||||||||
| Total prepaid expense and other | $ | 87,816 | $ | 76,906 | ||||||||||||
Property and equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the following estimated useful lives:
| Buildings | 39 years |
| Furniture and fixtures | 5 - 7 years |
| Computers and equipment | 3 - 5 years |
| Leasehold improvements | Shorter of estimated useful life or lease term |
| Scanners | 3 years |
| Vehicles | 3 - 5 years |
Expenditures for maintenance and repairs are charged to expense as incurred. When an asset is sold or otherwise disposed of, the cost and associated accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in the statement of income. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss is recognized if the carrying amount of the asset exceeds its fair value.
Leases
Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term. Leaseterm, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are classified and recognized at the lease commencement date of the lease. Lease liabilities are measured based on the estimated present value of lease payments over the lease term. ROU assets consist of (i) initial measurement of the lease liability; (ii) lease payments made to the lessor at or before the commencement date less any lease incentives received; and (iii) initial direct costs incurred by the Company. As the Company’s lessee leases do not provide a readily determinable implicit rate, theThe Company uses its estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease payments.
Goodwill and other intangible assets
Goodwill is recorded when the cost of acquired businesses exceeds the fair value of the identifiable net assets acquired. Goodwill and intangible assets with indefinite useful lives are not amortized, but are assessed for impairment annually on June 30.October 1. In addition, impairment testing is conducted when events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill and intangible assets with indefinite useful lives would be written down to fair value if considered impaired. Guidance under Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other (“ASC 350”), requires an entity to test goodwill for impairment on at least an annual basis. The Company had the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If under the quantitative assessment the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured. In fiscal years 2022 and 2020, a quantitative assessment was performed. The Company elected to perform the qualitative assessment during fiscal years 2019 and 2018year 2021, and determined that it is not more likely than not the carrying value exceeds the fair value of the reporting units.In fiscal year 2017, a quantitative assessment was performed. Intangible assets with finite useful lives are amortized to their estimated residual values over such finite lives using the straight-line method and reviewed for impairment whenever events or circumstances warrant such a review.
The Company has historically evaluated its goodwill for impairment annually as of June 30 or more frequently if impairment indicators arose in accordance with ASC 350, “Intangibles - Goodwill and Other.” In the fourth quarter of 2021, the Company changed the date of its annual assessment of goodwill to October 1 for all reporting units. The change in testing date for goodwill is a change in accounting principle, which management believes is preferable as the new date of the assessment better aligns with the Company’s budgeting process and will create a more efficient and timely process surrounding the impairment tests. The change in the assessment date does not delay, accelerate or avoid a potential impairment charge. The Company has determined that it is impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of each October 1 of prior reporting periods without the use of hindsight. As such, the Company prospectively applied the change in annual goodwill impairment testing date from October 1, 2021. No impairment was recognized during the years ended December 31, 2022 and 2020.
As discussed further in Note 20 of the Notes to Consolidated Financial Statements, during the fourth quarter of fiscal year 2021, the Company recognized an $18.2 million goodwill and intangibles impairment charge related to the Grow Tech segment, which was included in Restructuring and impairment expenses in the consolidated statement of income. During fiscal year 2022, the Company recorded a $1.7 million impairment of other intangibles.
The Company completed the annual goodwill and indefinite-lived intangible asset impairment testing as of October 1, 2022, and concluded that the fair value of the reporting units were determined to be in excess of its carrying amounts and no goodwill impairment charge was required. As of the October 1, 2022 testing date, the fair value of the Manufacturing reporting unit was estimated to be approximately 8% in excess of its carrying amount, and therefore the reporting unit is considered to be at risk of future impairment. The Manufacturing reporting unit’s fair value remains sensitive to significant unfavorable changes in revenue, gross margin and discount rates that could negatively impact future analyses.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the goodwill impairment tests will prove to be an accurate prediction of the future. Although the Manufacturing reporting unit showed strong revenue growth in fiscal year 2020 and 2021, the fair value of the reporting unit in the current year was negatively impacted by an increase in the discount rate due to the current interest rate environment, and lower near-term revenue projections. Current projections used for the Manufacturing reporting unit reflect revenue growth attributable to the continued expansion of capacity, continued intercompany sales to Nu Skin, and the recent acquisition of new customers. While historical performance and current expectations have resulted in fair values of the Manufacturing reporting unit in excess of carrying values, if the assumptions are not realized an impairment charge may be recorded in the future.
Equity investments
The Company holds strategic investments in other companies. These investments are accounted for under the measurement alternative described in ASC 321, Investments - Equity Securities (“ASC 321”) for equity investments that do not have readily determinable fair values. These investments are measured at cost, less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company does not exercise significant influence over these companies. These investments are carried on the consolidated balance sheets within Other Assets. Changes in fair value based on impairments or resulting from observable price changes are recorded in Other Income (expense), net on the consolidated statements of income. See Note 10 – Fair Value and Equity Investments, for further details around the Company’s equity investments.
Other assets
Other assets consist of the following (U.S. dollars in thousands):
| December 31, | December 31, | |||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Deferred taxes | $ | 30,780 | $ | 37,332 | $ | 89,770 | $ | 26,483 | ||||||||
| Deposits for noncancelable operating leases | 46,894 | 41,986 | 13,872 | 17,121 | ||||||||||||
| Cash surrender value for life insurance policies | 41,707 | 35,590 | 40,055 | 49,851 | ||||||||||||
Right-of-use assets, Financing, net | 14,259 | 6,477 | ||||||||||||||
| Derivative financial instruments | 10,582 | 6,033 | ||||||||||||||
| Long-term investments | 39,493 | 35,868 | ||||||||||||||
| Other | 34,635 | 29,204 | 36,398 | 33,627 | ||||||||||||
| Total other assets | $ | 154,016 | $ | 144,112 | $ | 244,429 | $ | 175,460 | ||||||||
Accrued expenses
Accrued expenses consist of the following (U.S. dollars in thousands):
| December 31, | December 31, | |||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Accrued sales force commissions and other payments | $ | 103,532 | $ | 128,022 | $ | 95,686 | $ | 139,793 | ||||||||
| Accrued income taxes | — | 6,674 | ||||||||||||||
| Accrued other taxes | 29,657 | 38,693 | 21,822 | 31,135 | ||||||||||||
| Accrued payroll and other employee expenses | 30,610 | 68,155 | 37,650 | 53,641 | ||||||||||||
| Accrued payable to vendors | 34,760 | 34,539 | 29,569 | 45,347 | ||||||||||||
| Short-term lease liability | 39,349 | — | ||||||||||||||
Short-term operating lease liability | 29,376 | 33,427 | ||||||||||||||
| Accrued royalties | 514 | 3,899 | 845 | 1,095 | ||||||||||||
| Sales return reserve | 3,903 | 3,577 | 3,359 | 3,513 | ||||||||||||
| Deferred revenue | 20,162 | 20,104 | 27,053 | 33,139 | ||||||||||||
| Other | 27,794 | 18,920 | 34,920 | 31,111 | ||||||||||||
| Total accrued expenses | $ | 290,281 | $ | 322,583 | $ | 280,280 | $ | 372,201 | ||||||||
Other liabilities
Other liabilities consist of the following (U.S. dollars in thousands):
| December 31, | December 31, | |||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Deferred tax liabilities | $ | 10,741 | $ | 18,236 | $ | 439 | $ | 2,385 | ||||||||
| Reserve for other tax liabilities | 17,121 | 14,382 | 35,532 | 21,774 | ||||||||||||
| Liability for deferred compensation plan | 43,238 | 36,398 | 44,427 | 54,213 | ||||||||||||
| Pension plan benefits reserve | 3,454 | 3,023 | ||||||||||||||
| Build to suit – financing obligation | — | 9,332 | ||||||||||||||
| Deferred rent and deferred tenant incentives | — | 5,665 | ||||||||||||||
| Contingent consideration | 6,364 | 10,341 | ||||||||||||||
Finance lease liabilities | 12,140 | 5,318 | ||||||||||||||
| Asset retirement obligation | 6,631 | 6,444 | 5,978 | 5,408 | ||||||||||||
| Other | 15,610 | 18,436 | 5,545 | 7,035 | ||||||||||||
| Total other liabilities | $ | 96,795 | $ | 111,916 | $ | 110,425 | $ | 106,474 | ||||||||
Revenue recognition
Net sales include products and shipping and handling charges, net of estimates for product returns and any related sales incentives. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. The Company recognizes revenue by transferring the promised products to the customer, with revenue recognized at shipping point, the point in time the customer obtains control of the products. The Company recognizes revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. A reserve for product returns is accrued based on historical experience totaling $3.9$3.4 million and $3.6$3.5 million as of December 31, 20192022 and 2018,2021, respectively. During the years ended December 31, 2019, 20182022, 2021 and 2017,2020, the Company recorded sales returns of $52.2$31.6 million, $52.0$52.1 million and $53.8$49.5 million, respectively. The Company generally requires cash or credit card payment at the point of sale. Accounts receivable generally represents amounts due from credit card companies and are generally collected within a few days of the purchase. As such, the Company has determined that no allowance for doubtful accounts is necessary. The majority of the Company’s contracts have a single performance obligation and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
Contract Liabilities – Customer Loyalty Programs
Contract liabilities, recorded as deferred revenue within the accrued expenses line in the Condensed Consolidated Balance Sheets,consolidated balance sheets, include loyalty point program deferrals with certain customers which are accounted for as a reduction in the transaction price and are generally recognized as points are redeemed for additional products on an annual basis.products.
Disaggregation of Revenue
Please refer to Note 1815 - Segment Information for revenue by segment and product line.
Arrangements with Multiple Performance Obligations
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenues to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers for individual products sales to customers.
Shipping and handling costs
Shipping and handling costs are recorded as cost of sales and are expensed as incurred.
Advertising expenses
Advertising costs are expensed as incurred.incurred and are included in general and administrative expenses in the accompanying consolidated statements of income. Advertising expense incurred for the years ended December 31, 2019, 20182022, 2021 and 20172020 totaled $16.3$14.5 million, $19.1$15.5 million and $15.6$14.7 million, respectively.
Selling expenses
Selling expenses are the Company’s most significant expense and are classified as operating expenses. Selling expenses include distributor commissions the Company pays to its Brand Affiliates, as well as salaries, service fees, benefits, bonuses and other labor and unemployment expenses the Company pays to its sales force in Mainland China.Selling expenses do not include amounts the Company pays to its sales force based on their personal purchases; rather, such amounts are reflected as reductions to revenue. The term “Brand Affiliates” refers to members of the Company’s independent sales force in all of the Company’s markets besides Mainland China. In each of the Company’s markets, except Mainland China, Sales Leaders can earn “multi-level” compensation under the Company’s global sales compensation plan, including commissions for product sales to their consumer groups as well as the product sales made through the sales network they have developed and trained. The Company does not pay commissions on sales materials.
Outside of Mainland China, the Company’s distributorsBrand Affiliates may make profits by purchasing the products from the Company at a discount and selling them to consumers with a mark-up. The Company does not account for nor pay additional commissions on these mark-ups received by distributors.Brand Affiliates. In many markets, the Company also allows individuals who are not members of its sales force, referred to as “preferred customers,” to buy products directly from the Company at a discount. The Company pays commissions on preferred customer purchases to the referring member of its sales force.
Research and development
Research and development costs are expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of income and totaled $30.1$23.3 million, $23.0$27.2 million and $22.0$23.3 million in 2019, 20182022, 2021 and 2017,2020, respectively.
Deferred tax assets and liabilities
The Company accounts for income taxes in accordance with the Income Taxes Topic of the Financial Accounting Standards Codification. These standards establish financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. The Company takes an asset and liability approach for financial accounting and reporting of income taxes. The Company pays income taxes in many foreign jurisdictions based on the profits realized in those jurisdictions, which can be significantly impacted by terms of intercompany transactions between the Company and its foreign affiliates. Deferred tax assets and liabilities are created in this process. The Company has netted these deferred tax assets and deferred tax liabilities by jurisdiction. These deferred tax assets assume sufficient future earnings will exist for their realization, and are calculated using anticipated tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized.
Uncertain tax positions
The Company files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. TheIn 2009, we entered into a voluntary program with the IRS called Compliance Assurance Process (“CAP”). Under the CAP program, the IRS audits the tax position of the Company to identify and resolve any tax issues that may arise throughout the tax year. As of December 31, 2022, tax years through 2020 have been audited and are effectively closed to further examination. For tax years 2021 and 2022, the Company is no longer subjectin the Bridge phase of the CAP program, pursuant to which the IRS will not accept disclosures, will not conduct reviews and will not provide letters of assurance for the year. There are limited circumstances that tax examinationsyears in the Bridge phase will be opened for examination. The company has applied for the CAP program for tax year 2023 and is currently waiting on approval from the IRS for all years for which tax returns have been filed before 2015.IRS. With a few exceptions, the Company iswe are no longer subject to state and local income tax examination by tax authorities for the years before 2015. In 2009, the Company entered into a voluntary program with the IRS called Compliance Assurance Process (“CAP”). The objective2019. Foreign jurisdictions have varying lengths of CAP is to contemporaneously work with the IRS to achieve federal tax compliance and resolve all or moststatutes of the issues prior to filing of the tax return. The Company has elected to participate in the CAP programlimitations for 2020 and may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time. In major foreign jurisdictions, the Company is generally no longer subject to income tax examinations forexaminations. Some statutes are as short as three years before 2013. However, statutesand in certain markets may be as long as ten years for transfer pricing related issues.years. The Company is currently under examination in certain foreign jurisdictions; however, the outcomes of those reviews are not yet determinable.
A reconciliation of the beginning and ending amount of unrecognized tax benefits included in other liabilities is as follows (U.S. dollars in thousands):
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Gross balance at January 1 | $ | 11,456 | $ | 5,514 | $ | 5,290 | $ | 15,090 | $ | 17,620 | $ | 13,507 | ||||||||||||
| Increases related to prior year tax positions | 775 | 5,161 | — | 6,768 | 4,146 | 2,958 | ||||||||||||||||||
| Decreases related to prior year tax positions | — | — | (277 | ) | ||||||||||||||||||||
| Increases related to current year tax positions | 2,273 | 3,704 | 669 | 5,485 | 1,794 | 3,302 | ||||||||||||||||||
| Settlements | — | (956 | ) | (159 | ) | (2,590 | ) | (5,494 | ) | (1,091 | ) | |||||||||||||
| Decreases due to lapse of statutes of limitations | (1,051 | ) | (1,483 | ) | (187 | ) | (95 | ) | (2,409 | ) | (1,377 | ) | ||||||||||||
| Currency adjustments | 54 | (484 | ) | 178 | (1,559 | ) | (567 | ) | 321 | |||||||||||||||
| Gross balance at December 31 | $ | 13,507 | $ | 11,456 | $ | 5,514 | $ | 23,099 | $ | 15,090 | $ | 17,620 | ||||||||||||
At December 31, 2019,2022, the Company had $13.5$23.1 million in unrecognized tax benefits of which $13.5$23.1 million, if recognized, would affect the effective tax rate. In comparison, at December 31, 2018,2021, the Company had $11.5$15.1 million in unrecognized tax benefits of which $11.4$15.1 million, if recognized, would affect the effective tax rate. The Company’s unrecognized tax benefits relate to multiple foreign and domestic jurisdictions. Due to potential increaseschanges in unrecognized tax benefits from the multiple jurisdictions in which the Company operates, as well as the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized tax benefits, net of foreign currency adjustments, may increase within the next 12 months by a range of approximately $0.5$2.0 to $2.0$3.0 million.
During the years ended December 31, 2019, 20182022, 2021 and 20172020 the Company recognized $0.7$5.7 million, $1.3$1.6 million and $0.7$1.5 million, respectively in interest and penalties expenses/(benefits).expenses related to uncertain tax positions. The Company had $3.6$12.4 million, $2.9$6.7 million and $1.6$5.1 million of accrued interest and penalties related to uncertain tax positions at December 31, 2019, 20182022, 2021 and 2017,2020, respectively. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
Net income per share
Net income per share is computed based on the weighted-average number of common shares outstanding during the periods presented. Additionally, diluted earnings per share data gives effect to all potentially dilutive common shares that were outstanding during the periods presented (Note 8).
Foreign currency translation
A significant portion of the Company’s business operations occuroccurs outside of the United States. The local currency of each of the Company’s Subsidiaries is considered its functional currency, except for the Company’s subsidiaries in Singapore and countries deemed highly inflationary where the U.S. dollar is used. All assets and liabilities are translated into U.S. dollars at exchange rates existing at the balance sheet dates, revenue and expenses are translated at weighted-average exchange rates and stockholders’ equity is recorded at historical exchange rates. The resulting foreign currency translation adjustments are recorded as a separate component of stockholders’ equity in the consolidated balance sheets and transaction gains and losses are included in other income (expense) in the consolidated financial statements.statements of income. Net of tax, the accumulated other comprehensive loss related to the foreign currency translation adjustments are $85.3$102.0 million (net of tax of $7.4$8.1 million), $79.9$79.1 million (net of tax of $7.9$7.5 million), and $66.4$65.6 million (net of tax of $5.8$7.1 million), at December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
Classification of a highly inflationary economy
A market is considered to have a highly inflationary economy if it has a cumulative inflation rate of approximately 100% or more over a three-year period as well as other qualitative factors including historic inflation rate trends (increasing and decreasing), the capital intensiveness of the operation and other pertinent economic factors. The functional currency in highly inflationary economies is required to be the functional currency of the entity’s parent company, and transactions denominated in the local currency are remeasured to the functional currency. The remeasurement of local currency into U.S. dollars creates foreign currency transaction gains or losses, which the Company includes in its consolidated statementstatements of income.
In the second quarter of 2018, published inflation indices indicated that the three-year cumulative inflation in Argentina exceeded 100 percent, and as of July 1, 2018, we elected to adopt highly inflationary accounting for our subsidiary in Argentina. Under highly inflationary accounting, Argentina’s functional currency became the U.S. dollar, and its income statement and balance sheet have been measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on peso-denominated monetary assets and liabilities has been reflected in earnings in Other income (expense), net and was not material. As of December 31, 2019,2022, and 2018,2021, Argentina had a small net peso monetary position. Net sales of Argentina were less than 2 percent of our consolidated net sales for the yearyears ended December 31, 2019, 20182022, 2021 and 2017.2020.
Fair value of financial instruments
The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate fair values due to the short-term nature of these instruments. The Company’s current investments as of December 31, 20192022 include certificates of deposits and pre-refunded municipal bonds that are classified by management as held-to-maturity as the Company had the positive intent and ability to hold to maturity. The carrying value of these current investments approximate fair values due to the short-term nature of these instruments. As of December 31, 20192022 and 2018,2021, the fair value of debt was $365.0$405.0 million and $434.5$377.5 million, respectively. The estimated fair value of the Company’s debt is based on interest rates available for debt with similar terms and remaining maturities.
The FASB Codification defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. On a quarterly basis, the Company measures at fair value certain financial assets, including cash equivalents. Accounting standards specify a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair-value hierarchy:
| ● | Level 1 – quoted prices in active markets for identical assets or liabilities; |
| ● | Level 2 – inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; |
| ● | Level 3 – unobservable inputs based on the Company’s own assumptions. |
Accounting standards permit companies, at their option, to measure many financial instruments and certain other items at fair value. The Company has elected not to apply the fair value option to existing eligible items.
Stock-based compensation
All share-based payments, including grants of stock options and restricted stock units, are required to be recognized in the Company’s financial statements based upon their respective grant date fair values. The Black-Scholes option-pricing model is used to estimate the fair value of stock options. The determination of the fair value of stock options is affected by the Company’s stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The Company uses historical volatility as the expected volatility assumption required in the Black-Scholes model. The expected life of the stock options is based on historical data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the Company’s stock options. The fair value of the Company’s restricted stock units is based on the closing market price of its stock on the date of grant less the Company’s expected dividend yield. The Company recognizes stock-based compensation net of actual forfeitures over the requisite service period of the award.
The total compensation expense related to equity compensation plans was $9.9$12.4 million, $26.6$23.2 million and $19.3$24.1 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively. In 2019, 20182022, 2021 and 2017,2020, these amounts reflect the reversal of $4.3, NaN,$1.3, none, and NaN,none, respectively, for certain performance-based awards that were no longer expected to vest. For the years ended December 31, 2019, 20182022, 2021 and 2017,2020, all stock-based compensation expense was recorded within general and administrative expenses.
Reporting comprehensive income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, and it includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and hedging activities
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives are recorded in current earnings or accumulated other comprehensive loss, dependingdepends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and its resulting designation. The gainsapply hedge accounting and losses in accumulated other comprehensive loss stemming from these derivatives will be reclassified into earningswhether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the period during whichfair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the hedgedexposure to variability in expected future cash flows, or other types of forecasted transaction affects earnings. Thetransactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the receivable and payable amounts relatedhedged asset or liability that are attributable to these unrealized gains and losses is classified as other current assets and liabilities.the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not use suchapply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments for trading or speculative purposes. Gains and lossesthat are subject to master netting agreements on certain intercompany loans of foreign currency are recorded as other income (expense) in the consolidated statements of income.a net basis by counterparty portfolio.
Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 requires companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The Company adopted the new standard effective January 1, 2019, using the modified retrospective transition method. The Company elected the package of practical expedients available under the transition provisions of the new lease standard, including: not reassessing whether expired or existing contracts are or contain leases; not reassessing the classification of expired or existing leases; not reassessing the initial direct cost for any existing leases; and using hindsight in determining the lease term. As a result of adopting this new accounting guidance, the Company derecognized the build-to-suit assets and financing liabilities that remained on the balance sheet following the construction period, and re-evaluated the classification of the associated lease under ASC 842, concluding the lease should be an operating lease. The Company also recognized right-of-use assets and lease liabilities for operating leases. The cumulative impact of adoption was a $0.7 million increase to beginning retained earnings. See Note 7 - Leases.
| 3. | Property and Equipment |
Property and equipment are comprised of the following (U.S. dollars in thousands):
| December 31, | December 31, | |||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Land | $ | 44,532 | $ | 35,709 | $ | 42,931 | $ | 45,027 | ||||||||
| Buildings | 273,264 | 295,748 | 274,049 | 281,192 | ||||||||||||
Construction in progress(1) | 17,707 | 18,153 | 64,566 | 44,021 | ||||||||||||
| Furniture and fixtures | 130,591 | 118,149 | 136,835 | 147,786 | ||||||||||||
| Computers and equipment | 147,806 | 160,873 | 145,934 | 162,746 | ||||||||||||
| Leasehold improvements | 160,623 | 147,604 | 114,633 | 129,675 | ||||||||||||
| Scanners | 8,040 | 8,986 | 6,438 | 6,746 | ||||||||||||
| Vehicles | 2,081 | 2,312 | 1,606 | 2,021 | ||||||||||||
| 784,644 | 787,534 | 786,992 | 819,214 | |||||||||||||
| Less: accumulated depreciation | (331,040 | ) | (322,999 | ) | (342,186 | ) | (365,540 | ) | ||||||||
| $ | 453,604 | $ | 464,535 | $ | 444,806 | $ | 453,674 | |||||||||
| (1) | Construction in progress includes |
Depreciation of property and equipment totaled $61.7$61.0 million, $56.4$62.9 million and $58.3$62.5 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively. The Company recorded an impairmentimpairments of $48.6$8.2 million and $13.7 million for the yearyears ended December 31, 20182022 and 2021, respectively, in connection with our fiscal year 20182022 and 2021 restructuring plan,plans, see Note 1720 – Restructuring and Severance Charges.
| 4. | Goodwill |
The following table presents goodwill allocated to the Company’s reportable segments for the periods ended December 31, 20192022 and 20182021 (U.S. dollars in thousands):
| December 31, 2019 | December 31, 2018 (1) | |||||||
| Nu Skin | ||||||||
| Mainland China | $ | 32,179 | $ | 32,179 | ||||
| Americas/Pacific | 9,449 | 9,449 | ||||||
| South Korea | 29,261 | 29,261 | ||||||
| Southeast Asia | 18,537 | 18,537 | ||||||
| Japan | 16,019 | 16,019 | ||||||
| EMEA | 2,875 | 2,875 | ||||||
| Hong Kong/Taiwan | 6,634 | 6,634 | ||||||
| Manufacturing | 72,469 | 72,469 | ||||||
| Grow Tech | 9,150 | 9,150 | ||||||
| Total | $ | 196,573 | $ | 196,573 | ||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Nu Skin | ||||||||
| Americas | $ | 9,449 | $ | 9,449 | ||||
| Mainland China | 32,179 | 32,179 | ||||||
| Southeast Asia/Pacific | 18,537 | 18,537 | ||||||
| South Korea | 29,261 | 29,261 | ||||||
| Japan | 16,019 | 16,019 | ||||||
| EMEA | 2,875 | 2,875 | ||||||
| Hong Kong/Taiwan | 6,634 | 6,634 | ||||||
| Rhyz Investments | ||||||||
| Manufacturing | 78,875 | 78,875 | ||||||
| Rhyz Other | 12,603 | 12,603 | ||||||
| Total | $ | 206,432 | $ | 206,432 | ||||
All of the Company’s goodwill is recorded in U.S. dollar functional currency and allocated to the respective segments. Goodwill is not amortized,amortized; rather, it is subject to annual impairment tests. AnnualIn connection with the Company’s decision to exit the Grow Tech segment, a $9.2 million impairment tests were completed resultingcharge was recorded in nothe year ended December 31, 2021, see Note 20 for further discussion regarding the restructuring and impairment charges for any of the periods shown.
Grow Tech segment.| 5. | Other Intangible Assets |
Other intangible assets consist of the following (U.S. dollars in thousands):
| Carrying Amount at December 31, | Carrying Amount at December 31, | |||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Indefinite life intangible assets: | ||||||||||||||||
| Trademarks and trade names | $ | 24,599 | $ | 24,599 | $ | 24,599 | $ | 24,599 | ||||||||
| Other indefinite lived intangibles | 3,763 | 3,763 | ||||||||||||||
| $ | 28,362 | $ | 28,362 | |||||||||||||
| December 31, 2019 | December 31, 2018 | ||||||||||||||||
| Finite life intangible assets: | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | Weighted-average Amortization Period | ||||||||||||
| Scanner technology | $ | 46,482 | $ | 45,724 | $ | 46,482 | $ | 42,690 | 18 years | ||||||||
| Developed technology | 22,500 | 20,856 | 22,500 | 20,032 | 20 years | ||||||||||||
| Distributor network | 11,598 | 11,598 | 11,598 | 11,598 | 15 years | ||||||||||||
| Trademarks | 5,938 | 2,462 | 5,823 | 1,812 | 11 years | ||||||||||||
| Other | 92,331 | 46,250 | 95,150 | 43,794 | 10 years | ||||||||||||
| $ | 178,849 | $ | 126,890 | $ | 181,553 | $ | 119,926 | 14 years | |||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||||||||
| Finite life intangible assets: | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | Weighted- average Amortization Period | ||||||||||||
| Scanner technology | $ | 40,716 | $ | 40,716 | $ | 40,716 | $ | 40,716 | 18 years | ||||||||
| Developed technology | 43,841 | 27,365 | 43,841 | 24,697 | 14 years | ||||||||||||
| Sales force network | 11,598 | 11,598 | 11,598 | 11,598 | 15 years | ||||||||||||
| Trademarks | 7,860 | 4,200 | 8,989 | 3,827 | 9 years | ||||||||||||
| Other | 48,285 | 26,319 | 51,176 | 23,090 | 8 years | ||||||||||||
| $ | 152,300 | $ | 110,198 | $ | 156,320 | $ | 103,928 | 13 years | |||||||||
Amortization of finite-life intangible assets totaled $13.4$9.7 million, $18.3$11.7 million and $8.1$9.8 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
The estimated annual amortization expense for each of the five succeeding fiscal years are as follows (U.S. dollars in thousands):
Year Ending December 31, | ||||||||
| 2020 | $ | 9,445 | ||||||
| 2021 | 7,945 | |||||||
| 2022 | 6,899 | |||||||
| 2023 | 6,759 | $ | 9,595 | |||||
| 2024 | 6,268 | 9,108 | ||||||
| 2025 | 7,826 | |||||||
| 2026 | 6,222 | |||||||
| 2027 | 4,373 | |||||||
Indefinite life intangible assets are not amortized, rather they are subject to annual impairment tests. Annual impairment tests were completed resulting in 0 impairment charges for any of the periods shown. Finite life intangibles are amortized over their useful lives unless circumstances occur that cause the Company to revise such lives or review such assets for impairment.
the Grow Tech segment. During 2022, the Company recorded a $1.7 million impairment charge for other intangibles associated with our 2022 restructuring, see Note 20 for further discussion.
| 6. | Long-Term Debt |
On October 9, 2014,April 18, 2018, the Company entered into a Credit Agreement (the “Previous“2018 Credit Agreement”) with variousseveral financial institutions as lenders and Bank of America, N.A., as administrative agent. The Previous2018 Credit Agreement provided for a $127.5$400 million term loan facility, a 6.6 billion Japanese yen term loan facility and a $187.5$350 million revolving credit facility, each with a term of five years. On October 10, 2014,Both facilities bore interest at the LIBOR, plus a margin based on the consolidated leverage ratio. The term loan facility amortized in quarterly installments in amounts resulting in an annual amortization of 5.0% during the first and second years, 7.5% during the third and fourth years and 10.0% during the fifth year after the closing date of the 2018 Credit Agreement, with the remainder payable at final maturity. The 2018 Credit Agreement required the Company drew the full amountto maintain a consolidated leverage ratio not exceeding 2.25 to 1.00 and a consolidated interest coverage ratio of the term loan facilities. On April 18, 2018, the Company repaid the full balance that was outstanding under the Previous Credit Agreement.no less than 3.00 to 1.00.
Credit Agreement
On April 18, 2018,June 14, 2022, the Company entered into aan Amended and Restated Credit Agreement (the “Credit Agreement”) with several financial institutions as lenders and Bank of America, N.A., as administrative agent.agent, which amended and restated the 2018 Credit Agreement. The Credit Agreement provides for a $400 million term loan facility and a $350$500 million revolving credit facility, each with a term of five years. Concurrently with the closing of the Credit Agreement, the Company drew the full amount of the term loan facility and $78.5 million of the revolving facility, each of which initiallyBoth facilities bear interest at the London Interbank Offered Rate (“LIBOR”),SOFR, plus 2.25%. The interest rate applicable to the facilities is subject to adjustmenta margin based on the Company’s consolidated leverage ratio. Commitment fees payable under the Credit Agreement are also based on the consolidated leverage ratio as defined in the Credit Agreement and range from 0.175% to 0.30% on the unused portion of the total lender commitments then in effect. The term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 2.5% during the first year and 5.0% during the firstsecond, third, fourth and secondfifth years 7.5% during the third and fourth years and 10.0% during the fifth year after the closing date of the Credit Agreement, with the remainder payable at final maturity. The Credit Agreement is guaranteed by certain of the Company’s domestic subsidiaries and collateralized by assets of such subsidiaries, including a pledge of 65% of the capital stock of certain foreign subsidiaries. The Credit Agreement requires the Company to maintain a consolidated leverage ratio not exceeding 2.252.75 to 1.00 and a consolidated interest coverage ratio of no less than 3.00 to 1.00. 1.00. As of December 31, 2019,2022, the Company was in compliance with all covenants under the Credit Agreement.
The following table summarizes the Company’s debt facilities as of December 31, 20192022 and 2018:2021:
Facility or Arrangement | Original Principal Amount | Balance as of December 31, 2022 (1)(2) | Balance as of December 31, 2021 (1)(2) | Interest Rate | Repayment Terms | |||||||
| 2018 Credit Agreement term loan facility | $400.0 million | — | $307.5 million | Principal amount was paid in full during June 2022. | ||||||||
| 2018 Credit Agreement revolving credit facility | — | $70.0 million | | Principal amount was paid in full during June 2022 and credit line was closed. | ||||||||
| Credit Agreement term loan facility | $400.0 million | $ | Variable 30 day: | 21% of the principal amount is payable in increasing quarterly installments over a five-year period that began on | ||||||||
| Credit Agreement revolving credit facility | $10.0 million | — | Variable 30 day: 6.17% | Revolving line of credit expires |
| (1) | As of December 31, |
| (2) | The carrying value of the debt reflects the amounts stated in the above table, less debt issuance costs of |
Maturities of all long-term debt at December 31, 2019, based on the year-end exchange rate,2022, are as follows (U.S. dollars in thousands):
Year Ending December 31, | ||||||||
| 2020 | $ | 27,500 | ||||||
| 2021 | 30,000 | |||||||
| 2022 | 37,500 | |||||||
| 2023 | 270,000 | $ | 15,000 | |||||
| 2024 | — | 20,000 | ||||||
| 2025 | 20,000 | |||||||
| 2026 | 20,000 | |||||||
| 2027 | 320,000 | |||||||
| Thereafter | — | — | ||||||
Total(1) | $ | 365,000 | $ | 395,000 | ||||
| (1) | The carrying value of the debt reflects the amounts stated in the above table less |
| 7. | Leases |
The Company has operating and finance leases for regional offices, manufacturing facilities, retail centers, distribution centers and certain equipment. The Company’s leases have remaining lease terms of 1 year to 2522 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases within 1 year.The Company has not separately disclosed finance leases, as they are not material, either individually or in the aggregate, to the Company’s consolidated financial statements.
As of December 31, 2019, the Company had $144.3 million of operating lease ROU assets on the balance sheet in “Right-of-use assets”, along with $39.3 million and $105.7 million of operating lease liabilities in “Accrued expenses” and “Long-term operating lease liabilities”, respectively. Additionally, as of December 31, 2019,2022, the weighted average remaining lease term was 8.8 and 4.6 years for operating and finance leases, respectively. As of December 31, 2022, the weighted average discount rate was 3.3% and 3.5% for operating leases was 6.0 years and 5.0%,finance leases, respectively.
The components of lease expense were as follows (U.S. dollars in thousands):
Year Ended December 31, 2019 | Year Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||
| Operating lease expense | ||||||||||||||||
| Operating lease cost | $ | 51,072 | $ | 39,682 | $ | 48,447 | $ | 51,828 | ||||||||
| Variable lease cost | 3,387 | 6,061 | 5,734 | 4,366 | ||||||||||||
| Short-term lease cost | 169 | 210 | 592 | 1,056 | ||||||||||||
| Sublease income | (5,743 | ) | — | (5,663 | ) | (5,052 | ) | |||||||||
| Finance lease expense | ||||||||||||||||
| Amortization of right-of-use assets | 2,371 | 2,398 | 1,023 | |||||||||||||
| Interest on lease liabilities | 268 | 319 | 154 | |||||||||||||
| Total lease expense | $ | 48,885 | $ | 48,592 | $ | 51,827 | $ | 53,375 | ||||||||
Supplemental cash flow information related to leases was as follows (U.S. dollars in thousands):
Year Ended December 31, 2019 | ||||
| Operating cash outflow | $ | 54,993 | ||
| ROU assets obtained in exchange for lease liabilities | $ | 184,502 | ||
| Year Ended December 31, | ||||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| Operating cash outflow from operating leases | $ | 37,174 | $ | 51,570 | $ | 56,395 | ||||||
| Operating cash outflow from finance leases | $ | 243 | $ | 322 | $ | 138 | ||||||
| Financing cash outflow from finance leases | $ | 1,919 | $ | 1,871 | $ | 709 | ||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | 34,026 | $ | 25,427 | $ | 82,662 | ||||||
| Right-of-use assets obtained in exchange for finance lease obligations | $ | 9,797 | $ | 74 | $ | 9,206 | ||||||
Maturities of lease liabilities were as follows (U.S. dollars in thousands):
Year Ending December 31, | Operating Leases | Operating Leases | Finance Leases | |||||||||
| 2020 | $ | 45,942 | ||||||||||
| 2021 | 38,545 | |||||||||||
| 2022 | 23,822 | |||||||||||
| 2023 | 17,949 | $ | 26,086 | $ | 3,836 | |||||||
| 2024 | 12,876 | 18,808 | 3,428 | |||||||||
| 2025 | 13,338 | 3,371 | ||||||||||
| 2026 | 8,692 | 3,277 | ||||||||||
| 2027 | 7,690 | 2,933 | ||||||||||
| Thereafter | 31,368 | 42,385 | — | |||||||||
| Total | 170,502 | 116,999 | 16,845 | |||||||||
| Less: Imputed interest | 25,452 | |||||||||||
| Total lease liability | $ | 145,050 | ||||||||||
| Less: Finance charges | 15,542 | 1,362 | ||||||||||
| Total principal liability | $ | 101,457 | $ | 15,483 | ||||||||
The Company has additional lease liabilities of $8.9$5.5 million which hadhave not yet commenced as of December 31, 2019,2022, and as such, have not been recognized on the consolidated balance sheets.
| Year Ending December 31, | Operating Leases | Financing Obligations | ||||||
| 2019 | $ | 39,358 | $ | 726 | ||||
| 2020 | 27,553 | 748 | ||||||
| 2021 | 20,266 | 757 | ||||||
| 2022 | 11,723 | 770 | ||||||
| 2023 | 9,950 | 794 | ||||||
| Thereafter | 7,628 | 1,148 | ||||||
| Total minimum lease payments | $ | 116,478 | $ | 4,943 | ||||
| 8. | Capital Stock |
The Company’s authorized capital stock consists of 25 million shares of preferred stock, par value $0.001 per share, 500 million shares of Class A common stock, par value $0.001 per share, and 100 million shares of Class B common stock, par value $0.001$0.001 per share. The sharesshare. As of Class A common stockDecember 31, 2022 and 2021, there were no preferred or Class B common stock are identical in all respects, except for voting rights and certain conversion rights and transfer restrictions, as follows: (1) eachshares outstanding. Each share of Class A common stock entitles the holder to 1one vote on matters submitted to a vote of the Company’s stockholders and each share of Class B common stock entitles the holder to 10 votes on each such matter; (2) stockstockholders. Stock dividends of Class A common stock may be paid only to holders of Class A common stock and stock dividends of Class B common stock may be paid only to holders of Class B common stock; (3) if a holder of Class B common stock transfers such shares to a person other than a permitted transferee, as defined in the Company’s Certificate of Incorporation, such shares will be converted automatically into shares of Class A common stock; and (4)stock. Class A common stock has no conversion rights; however, each share of Class B common stock is convertible into 1 share of Class A common stock, in whole or in part, at any time at the option of the holder. All outstanding Class B shares have been converted to Class A shares. As of December 31, 2019 and 2018, there were 0 preferred or Class B common shares outstanding.rights.
Weighted-average common shares outstanding
The following is a reconciliation of the weighted-average common shares outstanding for purposes of computing basic and diluted net income per share (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Basic weighted-average common shares outstanding | 55,518 | 55,170 | 52,806 | 50,002 | 50,193 | 52,296 | ||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||
| Stock awards and options | 409 | 1,061 | 1,110 | 523 | 1,234 | 469 | ||||||||||||||||||
| Convertible note | — | 245 | 936 | |||||||||||||||||||||
| Diluted weighted-average common shares outstanding | 55,927 | 56,476 | 54,852 | 50,525 | 51,427 | 52,765 | ||||||||||||||||||
For the years ended December 31, 2019, 20182022, 2021 and 2017,2020, other stock options totaling 1.40.1 million, 0.90.1 million and 0.4 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive. The convertible notes have a dilutive impact on EPS when the average market price of the Company’s common stock for a given period exceeds the initial conversion price. See Note 6 for discussion of initial conversion price and conversion rate.
Dividends
Quarterly cash dividends for the years ended December 31, 20192022 and 20182021 totaled $82.2$77.0 million and $80.6$76.3 million or $0.37$0.385 per share in all quarters of 20192022 and $0.365$0.38 for all quarters of 2018.2021. The board of directors has declared a quarterly cash dividend of $0.375$0.39 per share of Class A common stock to be paid on March 11, 20208, 2023 to stockholders of record on February 28, 2020.27, 2023.
Repurchases of common stock
In 1998,July 2018, the Company’s board of directors approved a stock repurchase plan authorizing the Company to repurchase $10.0 million of its outstanding shares of Class A common stock on the open market or in private transactions. The Company’s board from time to time increased the amount authorized under the 1998 stock repurchase plan, including an increase of $400.0 million announced in August 2013. In October 2015, the Company’s board terminated the 1998 stock repurchase plan and approved a new repurchase plan with an initial authorization amount of $500.0 million. In July 2018, the Company’s board of directors terminated the 2015 stock repurchase plan and approved a new repurchase plan with an initial authorization amount of $500 million. The repurchases are used primarily for strategic initiatives and to offset dilution from the Company’s equity incentive plans and from conversion of the Convertible Notes.plans. During the years ended December 31, 20182022, 2021 and 2017, the Company repurchased 0.5 million and 1.2 million shares of Class A common stock under the 2015 plan for an aggregate price of $40.6 million and $71.7 million, respectively. During the years ended December 31, 2019 and 2018,2020, the Company purchased 14,0001.7 million, 1.6 million and 0.45.1 million shares under the 2018 plan for $0.8$70.0 million, $80.4 million and $29.0$144.3 million, respectively. At December 31, 2019, $470.22022, $175.4 million was available for repurchases under the 2018 stock repurchase plan.
| 9. | Stock–Based Compensation |
At December 31, 2019,2022, the Company had the following stock-based employee compensation plans:
Equity Incentive Plans
In April 2010, the Company’s Boardboard of Directorsdirectors approved the Nu Skin Enterprises, Inc. 2010 Omnibus Incentive Plan (the “2010 Omnibus Incentive Plan”). This plan was approved by the Company’s stockholders at the Company’s 2010 Annual Meeting of Stockholders held in May 2010. The 2010 Omnibus Incentive Plan provides for granting of a variety of equity-based awards including stock options, stock appreciation rights, restricted stock, restricted stock units, other share-based awards, performance cash, performance shares and performance units to executives, other employees, independent consultants and directors of the Company and its subsidiaries. Options granted under the 2010 Omnibus Incentive Plan are generally non-qualified stock options, but the 2010 Omnibus Incentive Plan permits some stock options granted to qualify as “incentive stock options” under the U.S. Internal Revenue Code. The exercise price of a stock option generally is equal to the fair market value of the Company’s common stock on the stock option grant date. The contractual term of a stock option granted under the 2010 Omnibus Incentive Plan is seven years. Currently, all shares issued upon the exercise of stock options are from the Company’s treasury shares. Subject to certain adjustments, 7.0 million shares were authorized for issuance under the 2010 Omnibus Incentive Plan. On June 3, 2013, the Company’s stockholders approved an Amended and Restated 2010 Omnibus Incentive Plan, which among other things increased the number of shares available for awards by 3.2 million shares. On May 24, 2016, the Company’s stockholders approved a Second Amended and Restated 2010 Omnibus Incentive Plan, which among other things increased the number of shares available for awards by 3.8 million shares.
The fair value of stock option awards was estimated using the Black-Scholes option-pricing model with the following assumptions and weighted-average fair values as follows:
| December 31, | December 31, | |||||||||||||||||||
| Stock Options: | 2019 | 2018 | 2017 | 2021 | 2020 | |||||||||||||||
| Weighted-average grant date fair value of grants | $ | 19.72 | $ | 24.72 | $ | 18.84 | $ | 16.10 | $ | 8.59 | ||||||||||
Risk-free interest rate(1) | 2.5 | % | 2.6 | % | 2.1 | % | 0.5 | % | 1.4 | % | ||||||||||
Dividend yield(2) | 2.7 | % | 2.6 | % | 2.5 | % | 2.9 | % | 2.9 | % | ||||||||||
Expected volatility(3) | 42.4 | % | 45.6 | % | 48.2 | % | 49.5 | % | 40.7 | % | ||||||||||
Expected life in months(4) | 60 months | 66 months | 68 months | 56 months | 59 months | |||||||||||||||
| (1) | The risk-free interest rate is based upon the rate on a zero-coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of the grant. |
| (2) | The dividend yield is based on the average of historical stock prices and actual dividends paid. |
| (3) | Expected volatility is based on the historical volatility of the Company’s stock price, over a period similar to the expected life of the option. |
| (4) | The expected term of the option is based on the historical employee exercise behavior, the vesting terms of the respective option, and a contractual life of either seven or ten |
Options under the plans as of December 31, 20192022 and changes during the year ended December 31, 20192022 were as follows:
Shares (in thousands) | Weighted- average Exercise Price | Weighted- average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | Shares (in thousands) | Weighted- average Exercise Price | Weighted- average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||||||||||||||
| Options activity – service based | ||||||||||||||||||||||||||||||||
| Outstanding at December 31, 2018 | 1,046.5 | $ | 40.53 | |||||||||||||||||||||||||||||
| Outstanding at December 31, 2021 | 538.2 | $ | 35.89 | |||||||||||||||||||||||||||||
| Granted | — | — | — | — | ||||||||||||||||||||||||||||
| Exercised | (70.2 | ) | 32.38 | (340.0 | ) | 33.15 | ||||||||||||||||||||||||||
| Forfeited/cancelled/expired | (13.8 | ) | 41.49 | (34.3 | ) | 54.45 | ||||||||||||||||||||||||||
| Outstanding at December 31, 2019 | 962.5 | 41.11 | 2.87 | $ | 5,234 | |||||||||||||||||||||||||||
| Exercisable at December 31, 2019 | 775.4 | 42.59 | 2.77 | 4,000 | ||||||||||||||||||||||||||||
| Outstanding at December 31, 2022 | 163.9 | 37.69 | 0.35 | $ | 834 | |||||||||||||||||||||||||||
| Exercisable at December 31, 2022 | 163.9 | 37.69 | 0.35 | 834 | ||||||||||||||||||||||||||||
| Options activity – performance based | ||||||||||||||||||||||||||||||||
| Outstanding at December 31, 2018 | 2,370.8 | $ | 64.00 | |||||||||||||||||||||||||||||
| Outstanding at December 31, 2021 | 2,220.1 | $ | 40.87 | |||||||||||||||||||||||||||||
| Granted | 496.6 | 63.09 | — | — | ||||||||||||||||||||||||||||
| Exercised | (46.0 | ) | 50.79 | (340.5 | ) | 31.14 | ||||||||||||||||||||||||||
| Forfeited/cancelled/expired | (663.0 | ) | 71.73 | (418.0 | ) | 50.66 | ||||||||||||||||||||||||||
| Outstanding at December 31, 2019 | 2,158.4 | 61.75 | 4.16 | $ | 2,997 | |||||||||||||||||||||||||||
| Exercisable at December 31, 2019 | 698.1 | 46.06 | 3.82 | 2,997 | ||||||||||||||||||||||||||||
| Outstanding at December 31, 2022 | 1,461.6 | 40.30 | 3.89 | $ | 9,515 | |||||||||||||||||||||||||||
| Exercisable at December 31, 2022 | 958.6 | 39.46 | 3.41 | 7,193 | ||||||||||||||||||||||||||||
| Options activity – all options | ||||||||||||||||||||||||||||||||
| Outstanding at December 31, 2018 | 3,417.3 | $ | 56.81 | |||||||||||||||||||||||||||||
| Outstanding at December 31, 2021 | 2,758.3 | $ | 39.90 | |||||||||||||||||||||||||||||
| Granted | 496.6 | 63.09 | — | — | ||||||||||||||||||||||||||||
| Exercised | (116.2 | ) | 39.67 | (680.5 | ) | 31.65 | ||||||||||||||||||||||||||
| Forfeited/cancelled/expired | (676.8 | ) | 71.11 | (452.3 | ) | 50.95 | ||||||||||||||||||||||||||
| Outstanding at December 31, 2019 | 3,120.9 | 55.38 | 3.76 | $ | 8,231 | |||||||||||||||||||||||||||
| Exercisable at December 31, 2019 | 1,473.4 | 44.23 | 3.26 | 6,997 | ||||||||||||||||||||||||||||
| Outstanding at December 31, 2022 | 1,625.5 | 40.04 | 3.53 | $ | 10,349 | |||||||||||||||||||||||||||
| Exercisable at December 31, 2022 | 1,122.5 | 39.20 | 2.96 | 8,027 | ||||||||||||||||||||||||||||
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the respective years and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2019.2022. This amount varies based on the fair market value of the Company’s stock.
Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during 2019, 20182022, 2021 and 2017,2020, were as follows (U.S. dollars in thousands):
| December 31, | December 31, | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Cash proceeds from stock options exercised | $ | 368 | $ | 13,908 | $ | 26,980 | $ | 31,600 | $ | 14,435 | $ | 7,419 | ||||||||||||
| Tax benefit realized for stock options exercised | 430 | 3,217 | 6,457 | |||||||||||||||||||||
| Tax benefit / (expense) realized for stock options exercised | 229 | 807 | (459 | ) | ||||||||||||||||||||
| Intrinsic value of stock options exercised | 934 | 11,855 | 42,749 | 15,505 | 8,402 | 5,232 | ||||||||||||||||||
Nonvested restricted stock awards as of December 31, 20192022 and changes during the year ended December 31, 20192022 were as follows:
Number of Shares (in thousands) | Weighted- average Grant Date Fair Value | Number of Shares (in thousands) | Weighted- average Grant Date Fair Value | |||||||||||||
| Nonvested at December 31, 2018 | 467.5 | $ | 57.61 | |||||||||||||
Nonvested at December 31, 2021 | 884.9 | $ | 44.11 | |||||||||||||
| Granted | 341.9 | 59.59 | 587.1 | 46.04 | ||||||||||||
| Vested | (196.6 | ) | 56.72 | (326.6 | ) | 47.03 | ||||||||||
| Forfeited | (39.7 | ) | 59.17 | (192.4 | ) | 44.01 | ||||||||||
| Nonvested at December 31, 2019 | 573.1 | $ | 58.99 | |||||||||||||
| Nonvested at December 31, 2022 | 953.0 | $ | 44.28 | |||||||||||||
Nonvested performance share units as of December 31, 2022 and changes during the year ended December 31, 2022 were as follows:
Number of Shares (in thousands) | Weighted- average Grant Date Fair Value | |||||||
| Nonvested at December 31, 2021 | — | $ | — | |||||
| Granted | 192.7 | 44.39 | ||||||
| Vested | — | — | ||||||
| Forfeited | (12.5 | ) | 44.39 | |||||
| Nonvested at December 31, 2022 | 180.2 | $ | 44.39 | |||||
Stock-based compensation expense is recognized on a straight-line basis, except for performance-based awards for which expense is recognized using a graded-attribution method if the results are materially different than the straight-line method. The Company recognized $2.6 million, $3.1 millionnone, none and $4.0$0.3 million of expense related to service condition stock options in 2019, 20182022, 2021 and 2017,2020, respectively; and $11.5recognized $14.3 million, $11.2$15.4 million and $11.3$13.9 million of expense related to service condition restricted stock units in 2019, 20182022, 2021 and 2017,2020, respectively. For performance stock options and performance stock units, an expense is recorded each period for the estimated expense associated with the projected achievement of the performance-based targets. The Company recognized $4.1$2.0 million of income, $12.2$7.8 million of expense and $3.9 million of income related to performance stock options in 2019, 2018 and 2017, respectively; and $0.1$9.9 million of expense related to performance stock options in 2022, 2021 and 2020, respectively; and no expense related to performance stock units in 2019, 20182022, 2021 and 2017.2020. The amount in 20192022 reflects the reversal of stock compensation for awards no longer expected to vest.
As of December 31, 2019,2022, there was $0.3$0.1 million of unrecognized stock-based compensation expense related to nonvested stock option awards. That cost is expected to be recognized over a weighted-average period of 0.1 years. As of December 31, 2019,2022, there was $21.8$29.6 million of unrecognized stock-based compensation expense related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 2.6 years.
| 10. | Fair Valueand Equity Investments |
Fair Value
The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximate fair values due to the short-term nature of these instruments. Fair value estimates are made at a specific point in time, based on relevant market information.
The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis (U.S. dollars in thousands):
| Fair Value at December 31, 2019 | Fair Value at December 31, 2022 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||||||||
| Financial assets (liabilities): | ||||||||||||||||||||||||||||||||
| Cash equivalents and current investments | $ | 54,642 | $ | — | $ | — | $ | 54,642 | $ | 55,356 | $ | — | $ | — | $ | 55,356 | ||||||||||||||||
| Other long-term assets | 3,216 | — | — | 3,216 | ||||||||||||||||||||||||||||
| Derivative financial instruments asset | — | 19,738 | — | 19,738 | ||||||||||||||||||||||||||||
| Life insurance contracts | — | — | 41,707 | 41,707 | — | — | 40,055 | 40,055 | ||||||||||||||||||||||||
| Contingent consideration | — | — | (6,364 | ) | (6,364 | ) | ||||||||||||||||||||||||||
| Total | $ | 57,858 | $ | — | $ | 41,707 | $ | 99,565 | $ | 55,356 | $ | 19,738 | 33,691 | $ | 108,785 | |||||||||||||||||
| Fair Value at December 31, 2018 | Fair Value at December 31, 2021 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||||||||||||||
| Financial assets (liabilities): | ||||||||||||||||||||||||||||||||
| Cash equivalents and current investments | $ | 35,260 | $ | — | $ | — | $ | 35,260 | $ | 66,477 | $ | — | $ | — | $ | 66,477 | ||||||||||||||||
| Other long-term assets | 3,568 | — | — | 3,568 | ||||||||||||||||||||||||||||
| Derivative financial instruments asset | — | 6,590 | — | 6,590 | ||||||||||||||||||||||||||||
| Life insurance contracts | — | — | 35,590 | 35,590 | — | — | 49,851 | 49,851 | ||||||||||||||||||||||||
| Contingent consideration | — | — | (10,341 | ) | (10,341 | ) | ||||||||||||||||||||||||||
| Total | $ | 38,828 | $ | — | $ | 35,590 | $ | 74,418 | $ | 66,477 | $ | 6,590 | $ | 39,510 | $ | 112,577 | ||||||||||||||||
The following methods and assumptions were used to determine the fair value of each class of assets and liabilities recorded at fair value in the consolidated balance sheets:
Cash equivalents and current investments: Cash equivalents and current investments primarily consist of highly rated money market funds with maturities of three months or less, and are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, the Company considers all cash equivalents and current investments as Level 1. Current investments include $8.4$4.9 million and $11.3$5.2 million as of December 31, 20192022 and 2018,2021, respectively, that is restricted for the Company’s voluntary participation in a consumer protection cooperative in South Korea.Korea, along with investments in corporate securities.
Life insurance contracts: ASC 820 preserves practicability exceptions to fair value measurements provided by other applicable provisions of U.S. GAAP. The guidance in ASC 715-30-35-60 allows a reporting entity, as a practical expedient, to use cash surrender value or conversion value as an expedient for fair value when it is present. Accordingly, the Company determines the fair value of its life insurance contracts as the cash-surrender value of life insurance policies held in its Rabbi Trust as disclosed in Note 13, “Executive Deferred“Deferred Compensation Plan.”
Derivative financial instruments asset and liability: Derivative financial instruments are measured at fair value based on observable market information and appropriate valuation methods. See Note 14, “Derivative Financial Instruments” for more information on derivative financial instruments.
Contingent consideration: Contingent consideration represents the obligations incurred in connection with acquisitions. The estimate of fair value of the contingent consideration obligations requires subjective assumptions to be made regarding the future business results, discount rates, discount periods and probabilities assigned to various potential business result scenarios and was determined using probability assessments with respect to the likelihood of reaching various targets or of achieving certain milestones. The fair value measurement is based on significant inputs unobservable in the market and thus represents a level 3 measurement. Changes in current expectations of progress could change the probability of achieving the targets within the measurement periods and result in an increase or decrease in the fair value of the contingent consideration obligation.
The following table provides a summary of changes in fair value of the Company’s Level 3 life insurance contracts (U.S. dollars in thousands):
| 2022 | 2021 | |||||||
| Beginning balance at January 1 | $ | 49,851 | $ | 45,453 | ||||
| Actual return on plan assets | (9,180 | ) | 5,153 | |||||
| Purchases and issuances | — | 6,261 | ||||||
| Sales and settlements | (616 | ) | (7,016 | ) | ||||
| Ending balance at December 31 | $ | 40,055 | $ | 49,851 | ||||
The following table provides a summary of changes in fair value of the Company’s Level 3 marketable securitiescontingent consideration (U.S. dollars in thousands):
| Life Insurance Contracts | 2019 | 2018 | ||||||
| Beginning balance at January 1 | $ | 35,590 | $ | 37,737 | ||||
| Actual return on plan assets | 5,688 | (1,788 | ) | |||||
| Purchases and issuances | 2,003 | — | ||||||
| Sales and settlements | (1,574 | ) | (359 | ) | ||||
| Transfers into Level 3 | — | — | ||||||
| Ending balance at December 31 | $ | 41,707 | $ | 35,590 | ||||
2022 | 2021 | |||||||
| Beginning balance at January 1 | $ | (10,341 | ) | $ | (3,125 | ) | ||
| Additions from acquisitions | — | (8,702 | ) | |||||
| Changes in fair value of contingent consideration | 3,977 | 1,486 | ||||||
| Ending balance at December 31 | $ | (6,364 | ) | $ | (10,341 | ) | ||
Equity Investments
The Company maintains equity investments in companies which are accounted for under the measurement alternative described in ASC 321-10-35-2 for equity securities that lack readily determinable fair values. The carrying amount of equity securities held by the Company without readily determinable fair values was $28.1 million as of December 31, 2022 and 2021. During the year ended December 31, 2021, the Company made an additional investment of $5.0 million. During the year ended December 31, 2021, the Company recognized $18.1 million of upward fair value adjustments, based on the third quarter of 2021 valuation of additional equity issued by the investee which was deemed to be an observable transaction of a similar investment under ASC 321. The gain was recorded within Other income (expense), net on the consolidated statement of income. The upward fair value adjustment represents a nonrecurring fair value measurement based on observable price changes and is classified as a level 2 fair value measurement.
| 11. | Income Taxes |
Consolidated income before provision for income taxes consists of the following for the years ended December 31, 2019, 20182022, 2021 and 20172020 (U.S. dollars in thousands):
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| U.S. | $ | 24,211 | $ | (67,087 | ) | $ | 1,135 | $ | 24,411 | $ | 45,371 | $ | 71,138 | |||||||||||
| Foreign | 230,961 | 286,753 | 264,432 | 64,559 | 187,088 | 185,094 | ||||||||||||||||||
| Total | $ | 255,172 | $ | 219,666 | $ | 265,567 | $ | 88,970 | $ | 232,459 | $ | 256,232 | ||||||||||||
The provision for current and deferred taxes for the years ended December 31, 2019, 20182022, 2021 and 20172020 consists of the following (U.S. dollars in thousands):
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Current | ||||||||||||||||||||||||
| Federal | $ | — | $ | — | $ | (14,358 | ) | $ | — | $ | — | $ | — | |||||||||||
| State | 2,213 | 652 | 1,814 | 1,515 | 1,458 | 1,629 | ||||||||||||||||||
| Foreign | 79,694 | 116,303 | 104,688 | 34,117 | 77,393 | 77,079 | ||||||||||||||||||
| 81,907 | 116,955 | 92,144 | 35,632 | 78,851 | 78,708 | |||||||||||||||||||
| Deferred | ||||||||||||||||||||||||
| Federal | (8,878 | ) | (17,836 | ) | 45,593 | (65,733 | ) | 3,705 | (14,430 | ) | ||||||||||||||
| State | (473 | ) | (1,974 | ) | (2,273 | ) | (1,239 | ) | (38 | ) | (563 | ) | ||||||||||||
| Foreign | 9,063 | 634 | 666 | 15,532 | 2,675 | 1,162 | ||||||||||||||||||
| (288 | ) | (19,176 | ) | 43,986 | (51,440 | ) | 6,342 | (13,831 | ) | |||||||||||||||
| Provision for income taxes | $ | 81,619 | $ | 97,779 | $ | 136,130 | $ | (15,808 | ) | $ | 85,193 | $ | 64,877 | |||||||||||
The principal components of deferred taxes are as follows (U.S. dollars in thousands):
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Inventory differences | $ | 5,040 | $ | 4,257 | ||||
| Foreign tax credit and other foreign benefits | 69,820 | 62,521 | ||||||
| Stock-based compensation | 7,441 | 7,893 | ||||||
| Accrued expenses not deductible until paid | 35,374 | 40,509 | ||||||
| Foreign currency exchange | 163 | 1,023 | ||||||
| Net operating losses | 6,341 | 4,522 | ||||||
| Capitalized research and development | 18,716 | 11,988 | ||||||
| Interest expense limitation – 163(j) | — | 847 | ||||||
| R&D credit carryforward | 881 | 807 | ||||||
| Other | 37 | 339 | ||||||
| Gross deferred tax assets | 143,813 | 134,706 | ||||||
| Deferred tax liabilities: | ||||||||
| Foreign currency exchange | 721 | 124 | ||||||
| Foreign withholding taxes | 20,986 | 21,524 | ||||||
| Intangibles step-up | 4,958 | 5,763 | ||||||
| Overhead allocation to inventory | 3,611 | 2,857 | ||||||
| Amortization of intangibles | 15,393 | 15,812 | ||||||
| Other | 1,063 | 833 | ||||||
| Gross deferred tax liabilities | 46,732 | 46,913 | ||||||
| Valuation allowance | (77,042 | ) | (68,697 | ) | ||||
| Deferred taxes, net | $ | 20,039 | $ | 19,096 | ||||
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Deferred tax assets: | ||||||||
| Inventory differences | $ | 41,127 | $ | 5,859 | ||||
| Foreign tax credit and other foreign benefits | 51,273 | 69,401 | ||||||
| Stock-based compensation | 5,981 | 9,392 | ||||||
| Accrued expenses not deductible until paid | 37,181 | 36,401 | ||||||
| Foreign currency exchange | — | 605 | ||||||
| Net operating losses | 12,773 | 9,479 | ||||||
| Capitalized research and development | 26,406 | 22,962 | ||||||
| R&D credit carryforward | 1,795 | 1,451 | ||||||
| Other | 242 | 34 | ||||||
| Gross deferred tax assets | 176,778 | 155,584 | ||||||
| Deferred tax liabilities: | ||||||||
| Foreign currency exchange | 3,225 | — | ||||||
| Foreign withholding taxes | 15,375 | 15,412 | ||||||
| Intangibles step-up | 4,446 | 4,446 | ||||||
| Overhead allocation to inventory | 3,504 | 3,373 | ||||||
| Amortization of intangibles | 21,211 | 21,936 | ||||||
| Other | 6,129 | 6,133 | ||||||
| Gross deferred tax liabilities | 53,890 | 51,300 | ||||||
| Valuation allowance | (33,557 | ) | (80,186 | ) | ||||
| Deferred taxes, net | $ | 89,331 | $ | 24,098 | ||||
At December 31, 2019,2022, the Company had foreign operating loss carryforwards of $18.2$35.4 million for tax purposes, which will be available to offset future taxable income. If not used, $6.3$18.6 million of carryforwards will expire between 20202023 and 20292042, while $11.9$16.8 million do not expire. A valuation allowance has been placed on foreign operating loss carryforwards of $18.2$34.8 million, tax effected the valuation on the net operating loss is $6.3 million.$12.7 million. In addition, a valuation allowance of $19.1 million has been recorded on a portion of the foreign tax credit carryforward,carryforwards which will expire between 2028 and2031, and all of the R&D credit carryforward of $70.7$1.8 million which will expire between 20262036 and 20292041.
The Company uses the tax law ordering approach when determining when excess tax benefits have been realized.
Valuation allowances have been recognized for a portion of the foreign tax credit, the foreign net operating loss carryforwards, and the R&D credit carryforward. During 2022, the Company made an election to change its capitalization policy for tax purposes related to certain direct and indirect costs for inventory and self-constructed assets under Internal Revenue Code (“IRC”) Section 263A. This method change allows the Company to utilize a portion of its tax attributes related to foreign tax credits in the United States that were previously fully reserved. The impact of the method change is approximately $51.3 million from the utilization of foreign tax credits and the release of valuation allowances. This change only impacts a portion of the Company’s foreign tax credit carryforwards and the Company will maintain a valuation allowance against the remaining balance of foreign tax credit carryforwards. The remaining valuation allowances were recognized for assets which it is more likely than not some portion or all of the deferred tax asset will not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary difference, projected future taxable income, tax planning strategies and recent financial operations. When the Company determines that there is sufficient positive evidence to utilize the remaining foreign tax credits, the foreign net operating losses, or the R&D credit carryforward, the valuation allowance will be released which would reduce the provision for income taxes.
The deferred tax asset valuation adjustments for the years ended December 31, 2019, 20182022, 2021 and 20172020 are as follows (U.S. dollars in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Balance at the beginning of period | $ | 68,697 | $ | 56,906 | $ | 9,137 | $ | 80,186 | $ | 67,340 | $ | 77,042 | ||||||||||||
| Additions charged to cost and expenses | 10,913 | (1) | 27,902 | (4) | 53,983 | (6) | 3,231 | (1) | 12,674 | (4) | 2,154 | (6) | ||||||||||||
| Decreases | (3,343 | )(2) | (16,215 | )(5) | (6,400 | )(7) | (50,315 | )(2) | — | (5) | (12,100 | )(7) | ||||||||||||
| Adjustments | 775 | (3) | 104 | (3) | 186 | (3) | 455 | (3) | 172 | (3) | 244 | (3) | ||||||||||||
| Balance at the end of the period | $ | 77,042 | $ | 68,697 | $ | 56,906 | $ | 33,557 | $ | 80,186 | $ | 67,340 | ||||||||||||
| (1) | Increase in valuation is due primarily to |
| (2) | The decrease was due tax credits. |
| (3) | Represents the net currency effects of translating valuation allowances at current rates of exchange. |
| (4) | Increase in valuation is primarily due |
| (5) | No decreases in 2021. |
| (6) | Increase in valuation is due primarily to net operating losses in foreign markets. |
| (7) |
The components of deferred taxes, net on a jurisdiction basis are as follows (U.S. dollars in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||
| Net noncurrent deferred tax assets | $ | 30,780 | $ | 37,332 | $ | 89,770 | $ | 26,483 | ||||||||
| Net noncurrent deferred tax liabilities | 10,741 | 18,236 | 439 | 2,385 | ||||||||||||
| Deferred taxes, net | $ | 20,039 | $ | 19,096 | $ | 89,331 | $ | 24,098 | ||||||||
The Company is subject to regular audits by federal, state and foreign tax authorities. These audits may result in proposed assessments that may result in additional tax liabilities.
The actual tax rate for the years ended December 31, 2019, 20182022, 2021 and 20172020 compared to the statutory U.S. Federal tax rate is as follows:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Income taxes at statutory rate | 21.00 | % | 21.00 | % | 35.00 | % | 21.00 | % | 21.00 | % | 21.00 | % | ||||||||||||
| Indefinite reinvestment | — | (2.73 | )% | 2.75 | % | |||||||||||||||||||
| Excess tax benefit from equity award | 0.02 | % | (1.41 | )% | (2.38 | )% | (0.12 | )% | (0.19 | )% | 0.70 | % | ||||||||||||
| Deferred compensation | 2.18 | % | (0.46 | )% | (0.30 | )% | ||||||||||||||||||
| Executive salary limitation | 2.06 | % | 0.47 | % | 0.04 | % | ||||||||||||||||||
| Non-U.S. income taxed at different rates | 3.09 | % | 7.37 | % | — | 4.78 | % | 6.06 | % | 3.37 | % | |||||||||||||
| Foreign withholding taxes | 4.10 | % | 7.68 | % | — | (0.73 | )% | 4.71 | % | 5.21 | % | |||||||||||||
| Change in reserve for uncertain tax positions | 1.07 | % | 3.68 | % | — | 17.69 | % | (0.06 | )% | 1.98 | % | |||||||||||||
| Non-deductible expenses | — | — | 0.17 | % | ||||||||||||||||||||
| Controlled foreign corporation losses | — | — | (0.13 | )% | ||||||||||||||||||||
| Valuation allowance recognized foreign tax credit & others | 2.56 | % | 5.54 | % | 19.59 | % | (56.17 | )% | 5.12 | % | (4.59 | )% | ||||||||||||
| Write-off outside basis DTL | — | — | (2.89 | )% | ||||||||||||||||||||
| Revaluation of deferred taxes | — | 1.61 | % | (1.28 | )% | |||||||||||||||||||
| Foreign-Derived Intangible Income (FDII) | (0.70 | )% | — | — | (8.14 | )% | (0.87 | )% | (2.78 | )% | ||||||||||||||
| Other | 0.85 | % | 1.77 | % | 0.43 | % | (0.32 | )% | 0.87 | % | 0.69 | % | ||||||||||||
| 31.99 | % | 44.51 | % | 51.26 | % | (17.77 | )% | 36.65 | % | 25.32 | % | |||||||||||||
The decrease in effective tax rate for 2018the 2022 was significantly impacted by primarily due to the restructuringCompany making an election to change its capitalization policy for tax purposes related to certain direct and impairment expenses incurred in Q4indirect costs for inventory and self-constructed assets under Internal Revenue Code (“IRC”) Section 263A. This method change allows the Company to utilize a portion of 2018, as well as additional valuation allowancesits tax attributes related to foreign tax credits. credits in the United States that were previously fully reserved. The increase in the effective tax rate for 20172021 was impacted largely due toprimarily caused by the Tax Reform Act.disposal of the Company’s Grow Tech segment which reduced the utilization of foreign tax credits and increased the Company’s valuation allowance.
The cumulative amount of undistributed earnings of the Company’s non-U.S. Subsidiaries held for indefinite reinvestment is approximately $60.0 million, at December 31, 2019.2022. If this amount were repatriated to the United States, the amount of incremental taxes would be approximately $6.0 million.
| 12. | Employee Benefit Plan |
The Company has a 401(k) defined-contribution plan which permits participating employees to defer up to a maximum of 100% of their compensation, subject to limitations established by the IRS. Employees age 18 and older are eligible to contribute to the plan starting the first day of employment. After completing at least one day of service, employees are eligible to receive matching contributions from the Company. In 2019, 2018,2022, 2021, and 20172020 the Company matched employees’ base payprovided matching contributions of up to 4% of employees’ compensation each year. The Company’s matching contributions cliff vest after two years of service. The Company recorded compensation expense of $3.7$3.8 million, $3.6$4.8 million and $3.2$4.4 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively, related to its contributions to the plan. The Company may make additional discretionary contributions to the plan of up to 10% of employees’ base pay. The Company’s discretionary contributions vest 20% per year for an employee’s first five years of service. For the years ended December 31, 2019, 20182022, 2021 and 20172020, the Company did not make any additional discretionary contributions.
82
| 13. |
The Company has an executivea deferred compensation plan for select management personnel.personnel, highly compensated employees, and members of the Company’s board of directors. Under this plan, the Company may make a contribution of updiscretionary contributions to participants’ deferred compensation accounts; prior to 2021, the Company historically contributed 10% of base salary for participants above a participant’s salary.specified job level. In addition, each participant has the option to defer a portion of their compensation up to a maximum of 80% of their base salary and 100% of their bonuses.bonuses or director fees. Participant contributions are immediately vested. Company contributions made on or prior to December 31, 2020 will vest 50% after ten years of service and 5% each year of service thereafter. In addition, any unvested company contributions will fully vest on the earlier of: (a) the participant attaining 60 years of age; and (b) death or disability.
Effective January 1, 2021, the Company amended its deferred compensation plan. Under the revision, the Company shall make matching contributions up to 5% of base salary for participants above a specified job level. The revision continues to authorize the Company to make discretionary contributions to participants’ deferred compensation accounts. In view of the opportunity to receive a 5% match, the Company reduced its discretionary contributions to 5% of base salary each year, though the Company is not obligated to make these contributions. Under the revision, the amounts contributed by the Company, adjusted for earnings and losses thereon, will vest 20% per year over five years, subject to acceleration upon the occurrence of certain events, including the completion of at least ten years of employment above a specified job level. All amounts a participant elects to defer, adjusted for earnings and losses thereon, are 100% vested at all times.
The Company recorded compensation expense of $1.8$2.3 million, $1.1$4.0 million and $1.5$2.3 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively, related to its contributions to the plan. The total long-term deferred compensation liability under the deferred compensation plan was $43.2$44.4 million and $36.4$54.2 million for the years ended December 31, 20192022 and 2018,2021, respectively, related to its contributions to the plan and is included in other long-term liabilities.
All benefits under the deferred compensation plan are unsecured obligations of the Company. The Company has contributed assets to a “rabbi trust” for the payment of benefits under the deferred compensation plan. As the assets of the trust are available to satisfy the claims of general creditors if the Company becomes insolvent, the amounts held in the trust are accounted for as an investment on the Company’s consolidated balance sheetsheets of $41.7$40.1 million and $35.6$49.9 million for the years ended December 31, 20192022 and 2018,2021, respectively.
| 14. | Derivative Financial Instruments |
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into non-designated foreign currency derivatives, primarily comprised of foreign currency forward contracts, for which hedge accounting does not apply. The changesderivative financial instruments to manage exposures that arise from business activities that result in the fair marketreceipt or payment of future known and uncertain cash amounts, the value of these non-designatedwhich are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are includedto add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in other income/expenseexchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2022, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense/income as interest payments are made/received on the Company’s consolidated statements of income. Thevariable-rate debt. During the next twelve months, the Company uses non-designated foreign currency derivativesestimates that an additional $9.2 million will be reclassified as a reduction to hedge foreign-currency-denominated intercompany transactions and to partially mitigate the impact of foreign-currency fluctuations. The fair value of the non-designated foreign currency derivatives is based on third-party quotes that management considered when determining the fair value.interest expense.
As of December 31, 2019, and 2018, the Company did 0t hold any non-designated derivative contracts.
The following table summarizes the fair value of consideration transferred for the acquisitions disclosed above (in thousands):
| Innuvate | Treviso | L&W Holdings | Total | |||||||||||||
| Total cash consideration | $ | 17,587 | $ | 14,648 | $ | — | $ | 32,235 | ||||||||
| Shares issued in conjunction with acquisition | 5,863 | 69,252 | 25,000 | 100,115 | ||||||||||||
| Total consideration | $ | 23,450 | $ | 83,900 | $ | 25,000 | 132,350 | |||||||||
Previously held equity interest in equity method Investments(1) | 8,748 | 30,281 | — | 39,029 | ||||||||||||
| Total | $ | 32,198 | $ | 114,181 | $ | 25,000 | $ | 171,379 | ||||||||
| Innuvate | Treviso | L&W Holdings | |||||||||||||
| Net assets acquired: | Life | Amount | Life | Amount | Life | Amount | |||||||||
| Total current assets | $ | 6,219 | $ | 19,659 | $ | 7,353 | |||||||||
| Fixed assets | 9,291 | 33,282 | 114 | ||||||||||||
| Customer list | 9 years | 5,100 | 9 years | 16,500 | 7 years | 6,500 | |||||||||
| Order backlog | 5 months | 200 | 10 months | 4,700 | 4 months | 900 | |||||||||
| Trademarks | 7 years | 900 | 6 years | 1,300 | 5 years | 600 | |||||||||
| Total current liabilities | (3,942 | ) | (3,740 | ) | (1,495 | ) | |||||||||
| Other non-current liabilities | — | — | (1,731 | ) | |||||||||||
| Total identifiable net assets acquired | 17,768 | 71,701 | 12,241 | ||||||||||||
| Goodwill | 17,230 | 42,480 | 12,759 | ||||||||||||
| Fair value of noncontrolling interest | (2,800 | ) | — | — | |||||||||||
| Total consideration and value to be allocated to net assets | $ | 32,198 | $ | 114,181 | $ | 25,000 | |||||||||
Fair Values of Derivative Instruments | ||||||||||
| December 31, | ||||||||||
| Derivatives in Cash Flow Hedging Relationships: | Balance Sheet Location | 2022 | 2021 | |||||||
Interest Rate Swap - Asset | Prepaid expenses and other | $ | 9,156 | $ | 557 | |||||
| Interest Rate Swap - Asset | Other assets | $ | 10,582 | $ | 6,033 | |||||
The tables below present the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income.
Amount of Gain (Loss) Recognized in OCI on Derivatives | ||||||||||||
| Year Ended December 31, | ||||||||||||
Derivatives in Cash Flow Hedging Relationships: | 2022 | 2021 | 2020 | |||||||||
| Interest Rate Swaps | $ | 16,267 | $ | 5,391 | $ | 1,017 | ||||||
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | ||||||||||||||
| Year Ended December 31, | ||||||||||||||
Derivatives in Cash Flow Hedging Relationships: | Income Statement Location | 2022 | 2021 | 2020 | ||||||||||
| Interest Rate Swaps | Other income (expense), net | $ | 3,117 | $ | (157 | ) | $ | (24 | ) | |||||
| Restructuring, severance and impairment charges incurred | $ | 70,686 | ||
| Non-cash impairment charges | (48,551 | ) | ||
| Amounts paid | (6,673 | ) | ||
| Adjustments | — | |||
| Balance December 31, 2018 | $ | 15,462 | ||
| Amounts Paid | (15,046 | ) | ||
| Adjustments | (416 | ) | ||
| Balance December 31, 2019 | $ | — |
The Company reports revenue from 9nine segments, consisting of its 7seven geographic Nu Skin segments—Americas, Mainland China, Southeast Asia/Pacific, South Korea, Southeast Asia, Americas/Pacific, Japan, EMEA, and Hong Kong/Taiwan, Taiwan—and EMEA—and its two Rhyz Investments segments—Manufacturing and Grow Tech segments, which the Company decided to disclose separately beginning in the first quarter of 2019. Previously, these latter 2 segments were included in the Other category.Rhyz other. The OtherNu Skin other category includes miscellaneous corporate revenue and related adjustments. The Rhyz other segment includes other investments by our Rhyz strategic investment arm. These segments reflect the way the chief operating decision maker (“CODM”) evaluates the Company’s business performance and allocates resources. Reported revenue for these segments includes only the revenue generated by sales to external customers.The seven geographic Nu Skin segments generate revenue from the sale of personal care products and wellness products under the Nu Skin, Pharmanex and ageLOC brands, all of which have similar business characteristics and align with how the CODM function assesses performance and allocates resources.
Profitability by segment as reporteddetermined under U.S.US GAAP is driven primarily by the Company’s international taxationtransfer pricing policies. Segment contribution, which is the Company’s segment profitability metric presented in the table below, excludes certain intercompany charges, specifically royalties, license fees, transfer pricing, discrete charges and other miscellaneous items. These charges have been included in Corporate and other expenses. Corporate and other expenses also include costs related to the Company’s executive and administrative offices, information technology, research and development, and marketing and supply chain functions not recorded at the segment level.
Prior year segment information has been recast to reflect the fourth quarter of 2021 exit of the Grow Tech segment, which has been recast to Corporate and other expense. Prior year segment information has been recast to reflect the move of the Pacific components from the “America/Pacific” operating segments to the “Southeast Asia/Pacific” operating segment to comply with current segment presentation. Prior year segment information has been recast for a first quarter of 2021 change in the Company’s transfer pricing policies in the Americas segment, the 2020 Americas and Corporate and other segment contribution has been recast to conform with the new policy. Consolidated financial information is not affected.
The accounting policies of the segments are the same as those described in Note 1, “The Company.2, “Summary of Significant Accounting Policies.” The Company evaluates the performance of its segments based on revenue and segment contribution. Each segment records direct expenses related to its employees and its operations.
Summarized financial information for the Company’s reportable segments is shown in the following tables. Asset information is not reviewed or included with the Company’s internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
Revenue by Segment
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
| Nu Skin | ||||||||||||
| Mainland China | $ | 722,526 | $ | 886,472 | $ | 716,991 | ||||||
| Americas/Pacific | 349,078 | 385,034 | 342,429 | |||||||||
| South Korea | 329,978 | 373,357 | 361,692 | |||||||||
| Southeast Asia | 301,620 | 316,890 | 268,631 | |||||||||
| Japan | 260,039 | 254,939 | 256,085 | |||||||||
| EMEA | 167,165 | 182,394 | 160,275 | |||||||||
| Hong Kong/Taiwan | 166,335 | 185,893 | 166,696 | |||||||||
| Other | 1,621 | 3,423 | 6,300 | |||||||||
| Total Nu Skin | 2,298,362 | 2,588,402 | 2,279,099 | |||||||||
Manufacturing (1) | 121,917 | 90,606 | — | |||||||||
| Grow Tech | 137 | — | — | |||||||||
| Total | $ | 2,420,416 | $ | 2,679,008 | $ | 2,279,099 | ||||||
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2022 | 2021 | 2020 | |||||||||
| Nu Skin | ||||||||||||
| Americas | $ | 508,537 | $ | 547,755 | $ | 453,022 | ||||||
| Mainland China | 360,389 | 568,774 | 625,538 | |||||||||
| Southeast Asia/Pacific | 344,411 | 336,651 | 361,627 | |||||||||
| South Korea | 268,707 | 354,252 | 326,478 | |||||||||
| Japan | 224,896 | 266,216 | 273,681 | |||||||||
| EMEA | 204,275 | 283,200 | 230,246 | |||||||||
| Hong Kong/Taiwan | 157,197 | 162,611 | 161,117 | |||||||||
| Nu Skin Other | 3,959 | 3,653 | 886 | |||||||||
| Total Nu Skin | 2,072,371 | 2,523,112 | 2,432,595 | |||||||||
| Rhyz Investments | ||||||||||||
Manufacturing (1) | 149,458 | 172,120 | 149,339 | |||||||||
| Rhyz Other | 3,830 | 437 | — | |||||||||
| Total Rhyz Investments | 153,288 | 172,557 | 149,339 | |||||||||
| Total | $ | 2,225,659 | $ | 2,695,669 | $ | 2,581,934 | ||||||
| (1) | The Manufacturing segment had |
Segment Contribution
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
| Nu Skin | ||||||||||||
| Mainland China | $ | 191,570 | $ | 253,598 | $ | 211,625 | ||||||
| Americas/Pacific | 57,090 | 52,433 | 51,885 | |||||||||
| South Korea | 99,892 | 107,215 | 100,964 | |||||||||
| Southeast Asia | 82,455 | 78,598 | 63,296 | |||||||||
| Japan | 61,081 | 56,676 | 51,372 | |||||||||
| EMEA | 10,195 | 14,773 | 11,749 | |||||||||
| Hong Kong/Taiwan | 33,569 | 33,392 | 27,958 | |||||||||
| Nu Skin contribution | 535,852 | 596,685 | 518,849 | |||||||||
| Manufacturing | 15,693 | 7,754 | — | |||||||||
| Grow Tech | (19,509 | ) | (9,228 | ) | — | |||||||
| Total segment contribution | 532,036 | 595,211 | 518,849 | |||||||||
| Corporate and other | (264,610 | ) | (354,351 | ) | (244,366 | ) | ||||||
| Operating income | 267,426 | 240,860 | 274,483 | |||||||||
| Other income (expense) | (12,254 | ) | (21,194 | ) | (8,916 | ) | ||||||
| Income before provision for income taxes | $ | 255,172 | $ | 219,666 | $ | 265,567 | ||||||
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2022 | 2021 | 2020 | |||||||||
| Nu Skin | ||||||||||||
| Americas | $ | 110,522 | $ | 116,265 | $ | 86,386 | ||||||
| Mainland China | 72,362 | 151,645 | 181,024 | |||||||||
| Southeast Asia/Pacific | 85,827 | 81,779 | 87,753 | |||||||||
| South Korea | 81,804 | 114,034 | 100,933 | |||||||||
| Japan | 54,976 | 67,511 | 68,027 | |||||||||
| EMEA | 21,446 | 41,988 | 24,078 | |||||||||
| Hong Kong/Taiwan | 35,253 | 37,330 | 33,466 | |||||||||
| Nu Skin contribution | 462,190 | 610,552 | 581,667 | |||||||||
| Rhyz Investments | ||||||||||||
| Manufacturing | 3,570 | 18,346 | 21,168 | |||||||||
| Rhyz Other | (6,180 | ) | (1,813 | ) | — | |||||||
| Rhyz Investments contribution | (2,610 | ) | 16,533 | 21,168 | ||||||||
| Total segment contribution | 459,580 | 627,085 | 602,835 | |||||||||
| Corporate and other | (348,733 | ) | (393,093 | ) | (345,271 | ) | ||||||
| Operating income | 110,847 | 233,992 | 257,564 | |||||||||
| Other income (expense) | (21,877 | ) | (1,533 | ) | (1,332 | ) | ||||||
| Income before provision for income taxes | $ | 88,970 | $ | 232,459 | $ | 256,232 | ||||||
Depreciation and Amortization
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
| Nu Skin | ||||||||||||
| Mainland China | $ | 10,496 | $ | 13,036 | $ | 15,122 | ||||||
| Americas/Pacific | 864 | 988 | 1,746 | |||||||||
| South Korea | 5,093 | 6,266 | 6,499 | |||||||||
| Southeast Asia | 1,915 | 2,123 | 2,234 | |||||||||
| Japan | 3,866 | 3,604 | 3,554 | |||||||||
| EMEA | 1,260 | 847 | 985 | |||||||||
| Hong Kong/Taiwan | 2,310 | 1,316 | 1,395 | |||||||||
| Total Nu Skin | 25,804 | 28,180 | 31,535 | |||||||||
| Manufacturing | 6,689 | 11,281 | — | |||||||||
| Grow Tech | 4,008 | 1,885 | — | |||||||||
| Corporate and other | 40,149 | 41,657 | 40,029 | |||||||||
| Total | $ | 76,650 | $ | 83,003 | $ | 71,564 | ||||||
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2022 | 2021 | 2020 | |||||||||
| Nu Skin | ||||||||||||
| Americas | $ | 591 | $ | 871 | $ | 984 | ||||||
| Mainland China | 12,177 | 13,345 | 11,056 | |||||||||
| Southeast Asia/Pacific | 1,500 | 1,450 | 1,670 | |||||||||
| South Korea | 1,616 | 3,279 | 3,620 | |||||||||
| Japan | 1,011 | 906 | 1,876 | |||||||||
| EMEA | 854 | 1,106 | 1,017 | |||||||||
| Hong Kong/Taiwan | 3,743 | 3,637 | 2,912 | |||||||||
| Total Nu Skin | 21,492 | 24,594 | 23,135 | |||||||||
| Rhyz Investments | ||||||||||||
| Manufacturing | 13,838 | 11,765 | 8,081 | |||||||||
| Rhyz Other | 2,368 | 1,579 | — | |||||||||
| Total Rhyz Investments | 16,206 | 13,344 | 8,081 | |||||||||
| Corporate and other | 34,808 | 38,382 | 42,775 | |||||||||
| Total | $ | 72,506 | $ | 76,320 | $ | 73,991 | ||||||
Capital Expenditures
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
| Nu Skin | ||||||||||||
| Mainland China | $ | 14,814 | $ | 11,658 | $ | 4,539 | ||||||
| Americas/Pacific | 1,340 | 974 | 800 | |||||||||
| South Korea | 1,223 | 285 | 469 | |||||||||
| Southeast Asia | 759 | 1,120 | 1,753 | |||||||||
| Japan | 1,528 | 788 | 994 | |||||||||
| EMEA | 364 | 734 | 1,168 | |||||||||
| Hong Kong/Taiwan | 3,203 | 4,113 | 1,350 | |||||||||
| Total Nu Skin | 23,231 | 19,672 | 11,073 | |||||||||
| Manufacturing | 6,595 | 5,486 | — | |||||||||
| Grow Tech | 6,938 | 14,591 | — | |||||||||
| Corporate and other | 29,303 | 30,622 | 49,083 | |||||||||
| Total | $ | 66,067 | $ | 70,371 | $ | 60,156 | ||||||
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2022 | 2021 | 2020 | |||||||||
| Nu Skin | ||||||||||||
| Americas | $ | 204 | $ | 714 | $ | 1,061 | ||||||
| Mainland China | 10,692 | 24,382 | 19,363 | |||||||||
| Southeast Asia/Pacific | 263 | 1,330 | 2,197 | |||||||||
| South Korea | 727 | 854 | 1,420 | |||||||||
| Japan | 225 | 194 | 3,128 | |||||||||
| EMEA | 1,612 | 1,242 | 1,875 | |||||||||
| Hong Kong/Taiwan | 3,338 | 736 | 708 | |||||||||
| Total Nu Skin | 17,061 | 29,452 | 29,752 | |||||||||
| Rhyz Investments | ||||||||||||
| Manufacturing | 7,301 | 14,022 | 14,366 | |||||||||
| Rhyz Other | — | — | — | |||||||||
| Total Rhyz Investments | 7,301 | 14,022 | 14,366 | |||||||||
| Corporate and other | 34,694 | 25,141 | 19,705 | |||||||||
| Total | $ | 59,056 | $ | 68,615 | $ | 63,823 | ||||||
Revenue by Major Market
A major market is defined as one with total revenue greater than 10% of consolidated total revenue. Based on this criteria, the Company has identified 4four major markets: Mainland China, South Korea, Japan and the United States, the country of domicile.and Japan. There are approximately 45 other markets, each of which individually is less than 10%.No single customer accounted for 10% or more of net sales for the periods presented. Sales are recorded in the jurisdiction in which the transactions occurred:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (U.S. dollars in thousands) | 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | ||||||||||||||||||
| United States | $ | 537,081 | $ | 540,253 | $ | 425,155 | ||||||||||||||||||
| Mainland China | $ | 722,526 | $ | 886,472 | $ | 716,991 | 360,389 | 568,774 | 625,538 | |||||||||||||||
| South Korea | 329,978 | 373,357 | 361,692 | 268,707 | 354,252 | 326,478 | ||||||||||||||||||
| Japan | 260,039 | 254,939 | 256,085 | 224,896 | 266,216 | 273,681 | ||||||||||||||||||
| United States | 324,727 | 311,436 | 218,734 | |||||||||||||||||||||
| All others | 783,146 | 852,804 | 725,597 | 834,586 | 966,174 | 931,082 | ||||||||||||||||||
| Total | $ | 2,420,416 | $ | 2,679,008 | $ | 2,279,099 | $ | 2,225,659 | $ | 2,695,669 | $ | 2,581,934 | ||||||||||||
Revenue by Product Line
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (U.S. dollars in thousands) | 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Personal Care | $ | 1,423,485 | $ | 1,659,737 | $ | 1,456,386 | ||||||||||||||||||
| Beauty | $ | 1,069,714 | $ | 1,442,659 | $ | 1,491,803 | ||||||||||||||||||
| Wellness | 863,125 | 921,328 | 817,230 | 992,338 | 1,062,549 | 922,553 | ||||||||||||||||||
| Other | 133,806 | 97,943 | 5,483 | 163,607 | 190,461 | 167,578 | ||||||||||||||||||
| Total | $ | 2,420,416 | $ | 2,679,008 | $ | 2,279,099 | $ | 2,225,659 | $ | 2,695,669 | $ | 2,581,934 | ||||||||||||
Long-Lived Assets by Major Market
A major market is defined as a market with long-lived assets greater than 10% of consolidated long-lived assets and also includes the Company’s country of domicile (the United States). Long-lived assets in Mainland China consist primarily of property, plant and equipment and related to manufacturing, distribution facilities and the Mainland China headquarters. Long-lived assets in the United States consist primarily of property, plant and equipment, including the Company’s corporate offices and distribution facilities. As a result of adoption of ASC842, long-lived assets for 2019 include our ROU assets. Long-lived assets by major market are set forth below for the periods ended December 31, 2019, 20182022, 2021 and 2017:2020:
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
| United States | $ | 354,410 | $ | 317,516 | $ | 302,884 | ||||||
| Mainland China | 136,845 | 89,447 | 97,046 | |||||||||
| South Korea | 35,286 | 36,325 | 42,211 | |||||||||
| Japan | 12,015 | 6,864 | 9,342 | |||||||||
| All others | 59,374 | 14,383 | 13,104 | |||||||||
| Total | $ | 597,930 | $ | 464,535 | $ | 464,587 | ||||||
| Year Ended December 31, | ||||||||||||
| (U.S. dollars in thousands) | 2022 | 2021 | 2020 | |||||||||
| United States | $ | 343,482 | $ | 335,020 | $ | 348,028 | ||||||
| Mainland China | 132,148 | 149,124 | 152,312 | |||||||||
| South Korea | 30,867 | 25,364 | 39,104 | |||||||||
| Japan | 18,011 | 23,929 | 31,085 | |||||||||
| All others | 33,291 | 47,687 | 62,141 | |||||||||
| Total | $ | 557,799 | $ | 581,124 | $ | 632,670 | ||||||
| Commitments and Contingencies |
The Company is subject to government regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and the Company’s direct selling system. The Company is also subject to the jurisdiction of numerous foreign tax and customs authorities. Any assertions or determination that either the Company or the Company’s sales force is not in compliance with existing statutes, laws, rules or regulations could 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. 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. The Company and its Subsidiaries are defendants in litigation, investigations and other proceedings involving various matters. The Company is subject to loss contingencies, including various legal and regulatory proceedings, asserted and potential claims that arise in the ordinary course of business. An estimated loss from such contingencies is recognized as a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
The Company is subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. The Company believes it has appropriately provided for income taxes for all years. Several factors drive the calculation of its tax reserves. Some of these factors include: (i) the expiration of various statutes of limitations; (ii) changes in tax law and regulations; (iii) issuance of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors may result in adjustments to the Company’s reserves, which would impact its reported financial results.
| Other Income (Expense), Net |
Other income (expense), net was $12.3$21.9 million, $21.2$1.5 million and $8.9$1.3 million of expense in 2019, 20182022, 2021 and 2017,2020, respectively. Other income (expense), net also includes $19.213.5 million, $21.8$11.0 million and $22.2$13.1 million in interest expense during 2019, 20182022, 2021 and 2017,2020, respectively. The Company cannot estimate
| 18. | Supplemental Cash Flow Information |
Cash paid for interest totaled $14.5 million, $8.6 million and $11.2 million for the degree to which its operations will be impacted inyears ended December 31, 2022, 2021 and 2020, respectively. Cash paid for income taxes totaled $42.1 million, $96.0 million and $56.2 million for the future, but it remains subject to these currency risks.
years ended December 31, 2022, 2021 and 2020, respectively.In January 2020,April 2021, the Company has placedacquired 100% ownership in MyFavoriteThings, Inc. (“Mavely”) making Mavely a temporary holdwholly owned subsidiary of the Company. The acquisition enables the Company to continue to expand its digital tools. The purchase price for Mavely was $16.8 million, net of cash acquired of $0.4 million and $0.9 million to be paid within six months, all payable in cash. In addition, there is potential for an incremental $24.0 million in contingent consideration, which becomes payable if certain revenue and profitability targets are reached in 2021, 2022 and 2023. The fair value of the contingent consideration recorded on all in-person meetings with its sales force and customers in Mainland China in responsethe acquisition date was $8.7 million. The Company allocated the gross purchase price of $29.4 million to the outbreakassets acquired and liabilities assumed at estimated fair values. The estimated fair value of assets acquired included $16.4 million of intangible assets, $0.4 million of cash, $0.1 million of accounts receivable, and also resulted in a deferred tax liability of $3.5 million. The excess purchase price over the aggregate fair value of assets acquired less liabilities assumed of $12.6 million was recorded as goodwill. The goodwill recognized is attributable primarily to expected synergies. None of the coronavirus. Given the dynamic nature of these circumstances and business disruption, the company anticipates a significant short-term impact as public gatherings and travel remain restricted. The related financial impact cannot be reasonably estimated at this time butgoodwill is expected to materially affect our Mainland China segmentbe deductible for income tax purposes. The intangible assets acquired were comprised of $2.0 million for customer relationships, $11.3 million for technology, $2.8 million for trademarks and consolidated results$0.3 million for other intangibles. The intangibles were assigned useful lives of 8 years for the firsttechnology and secondtrademarks, approximately 4 years for the customer relationships and 3 years for the other intangibles. All the goodwill was assigned to our Rhyz other segment. The allocation of the fair value of assets acquired and liabilities assumed for the acquisition was finalized during the three months ended September 30, 2021.
| 20. | Restructuring and Severance Charges |
In 2021, the Company determined to exit the Grow Tech segment, to better align its resources on key strategic initiatives to achieve the future growth objectives and priorities of the core Nu Skin business. The Grow Tech segment was pursuing the commercialization of controlled-environment agriculture for use in the agriculture feed industry. This segment has been operating as part of the Company’s Rhyz strategic investment arm. As a result of the restructuring program, the Company recorded a non-cash charge of $38.5 million in 2021, including $9.2 million for impairment of goodwill, $9.0 million for impairment of intangibles, $13.7 million of fixed asset impairments and $6.6 million for inventory write-off, and $20.0 million of cash charges, including $6.5 million for employee severance and $13.5 million for other related cash charges with our restructuring. The restructuring charges were recorded in the Grow Tech segment. As of December 31, 2021, the $20.0 million liability related to cash charges was recorded within Accrued expenses. During 2022, the Company incurred $5.0 million in incremental cash charges associated with the exit activities and legal settlements. During 2022, the Company made cash payments of $20.0 million, leaving a restructuring accrual of $5.0 million as of December 31, 2022.
In the third quarter of 2022, the Company adopted a strategic plan to focus resources on the Company’s strategic priorities and full yearoptimize future growth and profitability. The global program includes workforce reductions and footprint optimization. The Company estimates total charges under the program will approximate $50–$55 million, with $40–$45 million in cash charges of fiscal 2020.severance and lease termination cost and approximately $10 million of non-cash charges of impairment of fixed assets, acceleration of depreciation and impairment of other intangibles related to the footprint optimization. The Company expects to substantially complete the program during the first half of 2023. During 2022, the Company incurred charges to be settled in cash of $20.1 million in severance charges, $7.4 million in lease termination cost, and $5.2 million in other associated cost, and non-cash charges of $8.2 million in fixed asset impairments, $0.9 million in accelerated depreciation and $1.7 million in impairment of other intangibles. During 2022, the Company made cash payments of $21.0 million related to this global program, leaving an ending restructuring accrual of $11.7 million.
Restructuring expense by segment
(U.S. dollars in thousands) | Year Ended December 31, 2022 | |||
| Nu Skin | ||||
| Americas | $ | 1,687 | ||
| Mainland China | 13,181 | |||
| Southeast Asia/Pacific | 1,809 | |||
| South Korea | 1,533 | |||
| Japan | 699 | |||
| EMEA | 2,143 | |||
| Hong Kong/Taiwan | 2,464 | |||
| Total Nu Skin | 23,516 | |||
| Rhyz Investments | ||||
| Manufacturing | 401 | |||
| Rhyz other | — | |||
| Total Rhyz Investments | 401 | |||
| Corporate and other | 19,577 | |||
| Total | $ | 43,494 | ||
To the Board of Directors and Stockholders of Nu Skin Enterprises, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Nu Skin Enterprises, Inc. and its subsidiaries (the “Company”) as of December 31, 20192022 and 2018,2021, and the related consolidated statements of income, andof comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2022, including the relatedrelated notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalinternal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes
As described in Notes 2 and 11 to the consolidated financial statements, the Company recorded a provisionbenefit for income taxes of $82$16 million for the year ended December 31, 20192022 and reported $20$89 million in deferred tax assets net of a valuation allowance of $77$34 million $47and $54 million in deferred tax liabilities, andliabilities. The Company also reported uncertain tax positions of $14$23 million as of December 31, 2019.2022. The Company pays income taxes in many foreign jurisdictions based on the profits realized in those jurisdictions, which can be significantly impacted by terms of intercompany transactions between the Company and its foreign affiliates. The Company takes an asset and liability approach for financial accounting and reporting of income taxes. Deferred tax assets and liabilities are created in this process and are calculated using anticipated tax rates and are then netted by jurisdiction. Management establishes valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized. The Company has recorded unrecognized tax benefits related to multiple foreign and domestic jurisdictions. As disclosed by management, potential changes in unrecognized tax benefits can arise from the multiple jurisdictions in which the Company operates, as well as the expiration of various statutes of limitation and possible completion of tax examinations.
The principal considerations for our determination that performing procedures relating to income taxes is a critical audit matter are that (i) there wasthe significant judgment by management when developing the provision for income taxes, deferred tax assets and the liability for unrecognized tax benefits, which in turn, led to significant auditor judgment, subjectivity and effort in performing audit procedures and evaluating audit evidence relating to these account balances and tax positions; and (ii) the audit effort included the involvement of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to income taxes. These procedures also included, among others, (i) testing the accuracy of the global income tax provision, including the rate reconciliation, return to provision adjustments, and permanent and temporary differences; (ii) evaluating management’s assessment of the realizability of deferred tax assets on a jurisdictional basis; and (iii)(iii) evaluating the identification of reserves for uncertain tax positions and the reasonableness of the “more likely than not determination” in consideration of the expiration of various statutes of limitations, changes in tax law and regulations, terms of intercompany agreements, and issuance of tax rulings and settlements with tax authorities. Professionals with specialized skill and knowledge were used to assist in the evaluation of the reasonableness of management’s estimates and application of local and international income tax law.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 12, 202015, 2023
We have served as the Company’s auditor since 1994.1994, which includes periods before the Company became subject to SEC reporting requirements.
None.
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the Securities and Exchange Commission under the Exchange Act, and they include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019.2022.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of management and directors; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed, as of December 31, 2019,2022, the effectiveness of our internal control over financial reporting. This assessment was based on criteria established in the framework Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.2022.
The effectiveness of our internal control over financial reporting as of December 31, 2019,2022, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting. There was no change during the fiscal quarter ended December 31, 20192022 in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The information required by Items 10, 11, 12, 13 and 14 of Part III will be included in an amendment to this Annual Report on Form 10-K or incorporated by reference to our Definitive Proxy Statement for our 20202023 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after our fiscal year end, except for certain information required by Item 10 with respect to our executive officers which is set forth under Item 1. Business of this Annual Report on Form 10-K.
Documents filed as part of this Form 10-K:
| 1. | Financial Statements. See Index to Consolidated Financial Statements under Item 8 of Part II. |
| 2. | Financial Statement Schedules. N/A |
| 3. | Exhibits. References to the “Company” shall mean Nu Skin Enterprises, Inc. Unless otherwise noted, the SEC file number for exhibits incorporated by reference is 001-12421. |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
*4.1 | |
4.2 | |
10.1 | |
#10.2 | |
#10.3 |
#10.4 |
#10.6 | |
#10.8 | |
#10.10 | |
*#10.11 | |
*#10.12 | |
*#10.13 | |
#10.14 | |
#10.15 | |
#10.16 | |
#10.17 | |
*#10.18 | |
#10.19 |
| *21.1 | |
*23.1 | |
*31.1 | |
*31.2 |
*32.1 | |
*32.2 | |
*101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
*101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
*101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
*101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
*101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
*101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
*104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
| * | Filed or furnished herewith. |
| # | Management contract or compensatory plan or arrangement. |
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 12, 2020.15, 2023.
| NU SKIN ENTERPRISES, INC. | ||
| By: | /s/ | |
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 12, 2020.15, 2023.
| Signatures | Capacity in Which Signed | |
| /s/ Steven J. Lund | Executive Chairman of the Board | |
| Steven J. Lund | ||
| /s/ | President, Chief Executive Officer and Director | |
| (Principal Executive Officer) | ||
| /s/ Mark H. Lawrence | Chief Financial Officer | |
| Mark H. Lawrence | (Principal Financial Officer) | |
| /s/ James D. Thomas | Chief Accounting Officer | |
| James D. Thomas | (Principal Accounting Officer) | |
| /s/ Emma S. Battle | Director | |
| Emma S. Battle | ||
| /s/ Daniel W. Campbell | Director | |
| Daniel W. Campbell | ||
| /s/ Andrew D. Lipman | Director | |
| Andrew D. Lipman | ||
| /s/ Laura Nathanson | Director | |
| Laura Nathanson | ||
| /s/ Thomas R. Pisano | Director | |
| Thomas R. Pisano | ||
| /s/ Zheqing Shen | Director | |
| Zheqing Shen | ||
| /s/ Edwina D. Woodbury | Director | |
| Edwina D. Woodbury |