ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q (this “Quarterly Report”) 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, product introductions and offerings, growth, 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 and beliefs regarding our markets and global economic conditions; statements regarding the payment of future dividends and stock repurchases; statements regarding the outcome of litigation, audits, investigations or other regulatory actions; statements regarding government policies and regulations relating to our industry, 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,” “optimistic,” “project,” “anticipate,” “determine,” “estimate,” “intend,” “plan,” “goal,” “objective,” “targets,” “become,” “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 the risk factors included in our Annual Report on Form 10-K for the 20202021 fiscal year and in our subsequent quarterly and other reports, including this Quarterly Report.
The following Management’s Discussion and Analysis should be read in conjunction with our consolidated financial statements and related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the 20202021 fiscal year, and our other reports filed with the Securities and Exchange Commission through the date of this Quarterly Report.
Overview
Revenue for the three-month period ended September 30, 2021March 31, 2022 decreased 9%11% to $641.2$604.9 million, compared to $703.3$677.0 million in the prior-year period, andperiod. Our revenue for the nine-month period ended September 30, 2021 increased 10% to $2.0 billion, compared to $1.8 billion in the prior-year period.first quarter of 2022 was negatively impacted 3% from foreign-currency fluctuations. Our Customers, Paid Affiliates and Sales Leaders decreased 15%declined 13%, 14% and Customers decreased 9%22%, respectively, on a year-over-year basis. Our reported revenue benefited 2% and 4% from foreign-currency fluctuations
The declines for the three-three-month period ended March 31, 2022 were largely driven by COVID-related lockdowns and nine-month periods ended September 30, 2021, respectively.
Our third quarter revenue was softer than anticipated as the COVID-19 delta variant created unexpected disruptionsother factors in many of our markets. The unanticipated government restrictions impacted our ability to sell and distribute products,eastern markets along with the largest impactcontinued softening in EMEA. We are looking forward to our Mainland China and Southeast Asia/Pacific markets, and also disrupted our promotional activities such asproduct launches, specifically the incentive trips andexpected launch of the performance of local exposageLOC LumiSpa iO in several markets. The revenue growth for the first nine months of 2021 benefited from a strong firstback half of 2021 where we benefitted from social commerce. We are continuing the launch of our two new products Beauty Focus Collagen+ and ageLOC Meta, with both being generally available for purchase in 2022.year.
Earnings per share for the thirdfirst quarter of 20212022 decreased 10%16% to $0.97,$0.76, compared to $1.08 in the prior-year period. Earnings per share for the first nine months of 2021 increased 36% to $3.03, compared to $2.23$0.91 in the prior-year period. The decrease in earnings per share for the third quarter wasis primarily driven by the decrease in revenue. The increase in earnings per share for the first nine-months of 2021 was driven by the increasedecline in revenue and fixed nature of general and administrative expenses on the increased revenue.along with decline in gross margin from sales promotions.
Segment Results
We report our business in tennine segments to reflect our current management approach. These segments consist of our seven geographic Nu Skin segments—Mainland China, Americas, South Korea, Southeast Asia/Pacific, South Korea, Japan, EMEA and Hong Kong/Taiwan and EMEA—and—and our three Rhyz Investment segments—Manufacturing Grow Tech and Rhyz other. The Nu Skin otherOther category includes miscellaneous corporate revenue and related adjustments. The Rhyz other segment includes other investments by our Rhyz strategic investment arm, which were entered into during the second quarter of 2021.
The following table sets forth revenue for the three- and nine-monththree-month periods ended September 30,March 31, 2022 and 2021 and 2020 for each of our reportable segments (U.S. dollars in thousands):
| | Three Months Ended September 30, | | | | Constant- Currency | | | Nine Months Ended September 30, | | | | Constant- Currency | | |
| | 2021 | | 2020 | | Change | | | Change(1) | | 2021 | | 2020 | | Change | | | Change(1) | | | Three Months Ended March 31, | | | | Constant-Currency | |
| | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | Change | | | Change(1) | |
Nu Skin | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mainland China | | $ | 134,291 | | | $ | 169,068 | | | (21 | )% | | (26 | )% | | $ | 438,066 | | | $ | 453,096 | | | (3 | )% | | (11 | )% | | $ | 124,495 | | | $ | 149,593 | | | (17 | )% | | (18 | )% |
Americas | | 131,482 | | | 133,618 | | | (2 | )% | | (2 | )% | | 403,755 | | | 312,436 | | | 29 | % | | 28 | % | | 123,580 | | | 133,761 | | | (8 | )% | | (6 | )% |
Southeast Asia/Pacific | | | 90,236 | | | 83,289 | | | 8 | % | | 11 | % |
South Korea | | 91,989 | | | 83,460 | | | 10 | % | | 8 | % | | 261,724 | | | 236,094 | | | 11 | % | | 5 | % | | 72,133 | | | 81,131 | | | (11 | )% | | (4 | )% |
Southeast Asia/Pacific | | 79,081 | | | 101,949 | | | (22 | )% | | (23 | )% | | 246,338 | | | 262,038 | | | (6 | )% | | (9 | )% | |
Japan | | | 61,791 | | | 69,864 | | | (12 | )% | | (3 | )% |
EMEA | | 55,839 | | | 61,411 | | | (9 | )% | | (11 | )% | | 215,134 | | | 147,590 | | | 46 | % | | 36 | % | | 52,968 | | | 76,180 | | | (30 | )% | | (25 | )% |
Japan | | 65,117 | | | 70,958 | | | (8 | )% | | (5 | )% | | 203,001 | | | 200,549 | | | 1 | % | | 2 | % | |
Hong Kong/Taiwan | | 39,921 | | | 42,265 | | | (6 | )% | | (8 | )% | | 114,795 | | | 115,253 | | | — | | | (4 | )% | | 38,494 | | | 36,345 | | | 6 | % | | 6 | % |
Nu Skin other | | | 889 | | | | (314 | ) | | 383 | % | | 382 | % | | | 2,350 | | | | 374 | | | 528 | % | | 530 | % | |
Other | | | | 620 | | | | 878 | | | (29 | )% | | (29 | )% |
Total Nu Skin | | 598,609 | | | 662,415 | | | (10 | )% | | (11 | )% | | 1,885,163 | | | 1,727,430 | | | 9 | % | | 5 | % | | 564,317 | | | 631,041 | | | (11 | )% | | (8 | )% |
Rhyz Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Manufacturing | | 41,635 | | | 40,910 | | | 2 | % | | 2 | % | | 135,760 | | | 105,975 | | | 28 | % | | 28 | % | | 40,341 | | | 45,985 | | | (12 | )% | | (12 | )% |
Grow Tech | | 783 | | | 22 | | | 3,459 | % | | 3,459 | % | | 1,147 | | | 336 | | | 241 | % | | 241 | % | |
Rhyz other | | | 125 | | | | — | | | | | | | | | | 163 | | | | — | | | | | | | | | | 241 | | | | — | | | | | | | |
Total Rhyz Investments | | | 42,543 | | | | 40,932 | | | 4 | % | | 4 | % | | | 137,070 | | | | 106,311 | | | 29 | % | | 29 | % | | | 40,582 | | | | 45,985 | | | (12 | )% | | (12 | )% |
Total | | $ | 641,152 | | | $ | 703,347 | | | (9 | )% | | (11 | )% | | $ | 2,022,233 | | | $ | 1,833,741 | | | 10 | % | | 6 | % | | $ | 604,899 | | | $ | 677,026 | | | (11 | )% | | (8 | )% |
(1) | Constant-currency revenue change is a non-GAAP financial measure. See “Non-GAAP Financial Measures,” below. |
The following table sets forth segment contribution for the three- and nine-monththree-month periods ended September 30,March 31, 2022 and 2021 and 2020 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 managecontrol for their respective segments. Prior year segment contribution has been recast for the fourth quarter of 2021 exit of the Grow Tech segment, the $6.1 million of expense has been recast to Corporate and other. For additional information regarding our segments and the calculation of segment contribution, see Note 10 to the consolidated financial statements contained in this report.
| | Three Months Ended September 30, | | | | | | Nine Months Ended September 30, | | | | | |
| | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change | | | Three Months Ended March 31, | | | | |
| | | | | | | | | | | | | | | 2022 | | 2021 | | Change | |
Nu Skin | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mainland China | | $ | 30,677 | | | $ | 54,522 | | | (44 | )% | | $ | 121,596 | | | $ | 135,577 | | | (10 | )% | | $ | 28,995 | | | $ | 39,439 | | | (26 | )% |
Americas | | 25,752 | | | 20,618 | | | 25 | % | | 83,495 | | | 48,730 | | | 71 | % | | 25,123 | | | 28,745 | | | (13 | )% |
Southeast Asia/Pacific | | | 23,406 | | | 19,648 | | | 19 | % |
South Korea | | 28,984 | | | 25,232 | | | 15 | % | | 84,401 | | | 73,421 | | | 15 | % | | 22,743 | | | 26,525 | | | (14 | )% |
Southeast Asia/Pacific | | 19,020 | | | 23,892 | | | (20 | )% | | 59,881 | | | 62,263 | | | (4 | )% | |
Japan | | | 15,313 | | | 17,981 | | | (15 | )% |
EMEA | | 6,693 | | | 7,111 | | | (6 | )% | | 29,270 | | | 11,084 | | | 164 | % | | 3,836 | | | 8,896 | | | (57 | )% |
Japan | | 16,267 | | | 18,245 | | | (11 | )% | | 50,709 | | | 49,292 | | | 3 | % | |
Hong Kong/Taiwan | | | 8,940 | | | | 9,048 | | | (1 | )% | | | 24,848 | | | | 22,825 | | | 9 | % | | | 8,690 | | | | 7,348 | | | 18 | % |
Total Nu Skin | | 136,333 | | | 158,668 | | | (14 | )% | | 454,200 | | | 403,192 | | | 13 | % | | 128,106 | | | 148,582 | | | (14 | )% |
Rhyz Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Manufacturing | | 3,059 | | | 6,749 | | | (55 | )% | | 15,649 | | | 15,000 | | | 4 | % | | 3,292 | | | 5,826 | | | (43 | )% |
Grow Tech | | (6,798 | ) | | (5,322 | ) | | (28 | )% | | (19,869 | ) | | (17,659 | ) | | (13 | )% | |
Rhyz other | | | (659 | ) | | | — | | | | | | | (1,178 | ) | | | — | | | | | | | (1,046 | ) | | | — | | | | |
Total Rhyz Investments | | (4,398 | ) | | 1,427 | | | (408 | )% | | (5,398 | ) | | (2,659 | ) | | (103 | )% | | 2,246 | | | 5,826 | | | (61 | )% |
The following table provides information concerning the number of Customers, Paid Affiliates and Sales Leaders asin our core Nu Skin business for the three-month periods ended March 31, 2022 and 2021. 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 this is an important indicator of September 30, 2021 and 2020. “Customers” are persons who have purchased products directly fromconsumer purchasing activity in our business. 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.business. The definition of our Customer metric remained unchanged. We have recast the 2021 Sales Leaders to the new definition. Except as discussed below regarding our Southeast Asia/Pacific segment, the trends under the new definition were materially consistent with those under the previous definition.
| | As of September 30, 2021 | | | As of September 30, 2020 | | | % Increase (Decrease) | |
| | Customers | | | Sales Leaders | | | Customers | | | Sales Leaders | | | Customers | | | Sales Leaders | |
| | | | | | | | | | | | | | | | | | |
Mainland China | | | 355,256 | | | | 13,838 | | | | 341,386 | | | | 20,970 | | | | 4 | % | | | (34 | )% |
Americas | | | 324,880 | | | | 12,127 | | | | 397,936 | | | | 12,798 | | | | (18 | )% | | | (5 | )% |
South Korea | | | 156,439 | | | | 9,448 | | | | 164,256 | | | | 7,973 | | | | (5 | )% | | | 18 | % |
Southeast Asia/Pacific | | | 162,048 | | | | 7,607 | | | | 204,489 | | | | 9,959 | | | | (21 | )% | | | (24 | )% |
EMEA | | | 210,705 | | | | 5,726 | | | | 235,202 | | | | 6,226 | | | | (10 | )% | | | (8 | )% |
Japan | | | 123,453 | | | | 6,029 | | | | 126,896 | | | | 6,523 | | | | (3 | )% | | | (8 | )% |
Hong Kong/Taiwan | | | 62,490 | | | | 3,790 | | | | 69,346 | | | | 4,067 | | | | (10 | )% | | | (7 | )% |
Total | | | 1,395,271 | | | | 58,565 | | | | 1,539,511 | | | | 68,516 | | | | (9 | )% | | | (15 | )% |
| ● | “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 products directly from members of our sales force. |
| ● | “Paid Affiliates” are any Brand Affiliates, as well as sales employees and independent marketers 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 had achieved certain qualification requirements as of the end of each month of the quarter. |
Following | | Three Months Ended March 31, | | | | |
Customers | | 2022 | | | 2021 | | | Change | |
Mainland China | |
| 289,060 | | | | 316,000 | | | | (9 | )% |
Americas | | | 318,458 | | | | 374,867 | | | | (15 | )% |
Southeast Asia/Pacific | | | 165,657 | | | | 185,435 | | | | (11 | )% |
South Korea | | | 140,648 | | | | 152,390 | | | | (8 | )% |
Japan | | | 122,616 | | | | 126,525 | | | | (3 | )% |
EMEA | | | 216,037 | | | | 296,001 | | | | (27 | )% |
Hong Kong/Taiwan | | | 68,975 | | | | 66,042 | | | | 4 | % |
Total | | | 1,321,451 | | | | 1,517,260 | | | | (13 | )% |
| | Three Months Ended March 31, | | | | |
Paid Affiliates | | 2022 | | | 2021 | | | Change | |
Mainland China | |
| 22,762 | | | | 41,944 | | | | (46 | )% |
Americas | | | 46,281 | | | | 52,767 | | | | (12 | )% |
Southeast Asia/Pacific | | | 43,262 | | | | 45,871 | | | | (6 | )% |
South Korea | | | 49,328 | | | | 51,006 | | | | (3 | )% |
Japan | | | 38,059 | | | | 38,283 | | | | (1 | )% |
EMEA | | | 33,834 | | | | 43,696 | | | | (23 | )% |
Hong Kong/Taiwan | | | 17,910 | | | | 17,885 | | | | — | |
Total | | | 251,436 | | | | 291,452 | | | | (14 | )% |
| | Three Months Ended March 31, | | | | |
Sales Leaders | | 2022 | | | 2021 | | | Change | |
Mainland China | |
| 14,146 | | | | 23,013 | | | | (39 | )% |
Americas | | | 9,547 | | | | 11,394 | | | | (16 | )% |
Southeast Asia/Pacific | | | 8,012 | | | | 8,446 | | | | (5 | )% |
South Korea | | | 6,072 | | | | 6,682 | | | | (9 | )% |
Japan | | | 5,977 | | | | 6,135 | | | | (3 | )% |
EMEA | | | 5,455 | | | | 7,479 | | | | (27 | )% |
Hong Kong/Taiwan | | | 3,253 | | | | 3,755 | | | | (13 | )% |
Total | | | 52,462 | | | | 66,904 | | | | (22 | )% |
The following is a narrative discussion of our results in each segment, which supplements the tables above.
Mainland China. Our Mainland China market continued to be challenged during the
thirdfirst quarter of
2021, as the COVID-19 delta variant2022, with COVID-related lockdowns and
corresponding government restrictionsother factors negatively
impactedimpacting our selling and promotional activities.
Our revenue benefitted 5%Due to increasing COVID-19 cases, the government implemented more significant lockdowns that precluded gatherings and
8% from favorable foreign-currency fluctuationsmeetings for the
thirdgeneral population in Shanghai and other areas. Revenue in this market benefited from our recently launched products, which generated approximately $18.0 million in revenue during the quarter, and
first nine monthsfrom utilizing discounted product promotions. As previously disclosed, we anticipate that COVID-related challenges will persist throughout 2022.
In addition, in February 2022, we learned of 2021, respectively. Our Customers benefitedreports in the Chinese media of COVID-19 cases that were reportedly traced back to a meeting in a hotel in Wuhan, Hubei Province organized by an independent marketer of Nu Skin China. The meeting was not authorized by Nu Skin China and was not registered with the applicable government authorities. After learning of the incident, we suspended all Sales Leader meetings in the Hubei Province, ceased operations in our Hubei Province branch office and conducted PCR tests on employees in that branch office. After the Wuhan meeting incident, various offices of Mainland China’s Administration for Market Regulation (the “AMRs”) began inquiries into our Nu Skin China business activities since early 2020. We were also later asked to provide information to Mainland China’s Ministry of Commerce, which we did. We cooperated with the government, and we believe these matters are nearly resolved.
Upon receiving the inquiries from the rolloutAMRs, we proactively suspended all Sales Leader meetings throughout the Mainland China market. Shortly thereafter, as noted above, the government instituted more significant lockdowns in Shanghai and other areas in Mainland China due to rising COVID-19 cases. We believe the meeting restrictions negatively impacted our business momentum in this market. While we currently anticipate resuming Sales Leader meetings when the government-imposed lockdowns are lifted, we believe the loss of momentum will impact this market’s performance through the rest of this year. As we continue to invest in new social commerce technologies in this market, our Tencent digital tools, which launched in September of 2021.focus is to decrease dependence on in-person meetings.
The year-over-year decrease in segment contribution for the thirdfirst quarter and first nine months of 2021 is attributable to decreased reported2022 primarily reflects lower revenue, and a 5.2 percentage point and 2.7 percentage point, respectively, increase in selling expense as a percentage of revenue. The salaries and service fees of our Sales Leaders in Mainland China are fixed until they are adjusted in a quarterly evaluation process. As a result, we have variations in our selling expenses as a percentage of revenue, particularly when there is a sequential change in revenue. The third quarter decline is also attributable to the fixed nature of general and administrative expenses on lowerand a 2.7 percentage point decrease in gross margin attributable to increased product promotions and an unfavorable sales mix, which was partially offset by a 1.7 percentage point improvement in selling expenses as a percentage of revenue.
Americas. Our Americas segment continued to benefit from greater adoption of innovative products shared increasingly via the social commerce business model supported by our digital tools, which drove increased revenue in the first nine months of 2021. The decline in revenue, Customers, Paid Affiliates and Sales Leaders and Customersin our Americas segment is predominately attributable to continued economic challenges in our Latin America markets. Our U.S. market’s revenue increased 15% for the thirdfirst quarter of 2021 is predominately due to2022 from continued momentum, specifically from the continued economic instability in the Latin America markets, Argentina in particular, which is experiencing hyperinflation. Our U.S. market experienced 14% revenue growth for the third quarter, which is primarily attributable to a strong product launch of Beauty Focus Collagen+, with approximately $19 million in revenue for during the quarter.second half of 2021 and continued social adoption.
The year-over-year increase in segment contribution for the third quarter of 2021 primarily reflects the increase in revenue in our U.S. market, which carries a more favorable gross margin than our Latin America markets; this was partially offset by an increase in selling expenses as a percent of revenue from the increased cost of incentive trips. The increasedecline in segment contribution for the first nine monthsquarter of 20212022 primarily reflects the decrease in revenue, a 1.8 percentage point decrease in gross margin, primarily attributable to higher sales promotions and an unfavorable product mix in the first quarter. Our Americas segment contribution was also negatively impacted by the fixed nature of general and administrative expenses.
Southeast Asia/Pacific. Our Southeast Asia/Pacific segment revenue increased 8% for the first quarter of 2022, with a 3% negative impact from unfavorable foreign-currency fluctuations. The increase in revenue was partially driven by a strong product launch of ageLOC Meta (locally referred to as ageLOC Reset in the Southeast Asia markets), which generated approximately $13.2 million in revenue along with 2.6 percentage point increasethe loosening of COVID restrictions in gross margin, and improvements in general and administrative expenses due to the fixed nature on increased revenue, all partially offset by a slight increase in selling expenses as a percent of revenue, from increased cost of incentive trips.
21Manufacturing
The 43% decline in segment contribution is attributed to the lower revenue on fixed costs, along with the revenue mix between our manufacturing entities with different profitability.
Consolidated Results
Revenue
Revenue for the three-month period ended September 30, 2021March 31, 2022 decreased 9%11% to $641.2$604.9 million, compared to $703.3$677.0 million in the prior-year period. Revenue for the nine-month period ended September 30, 2021 increased 10% to $2.0 billion compared to $1.8 billion. Our reported revenue benefited 2% and 4% from foreign-currency fluctuations for the three- and nine-month periods ended September 30, 2021, respectively. For a discussion and analysis of these changesthis decrease in revenue, see “Overview” and “Segment Results,” above.
Gross profit
Gross profit as a percentage of revenue was 75.2% for the third quarter of 2021, compared to 73.9% for the prior-year period, and 75.2%73.3% for the first nine monthsquarter of 2021,2022 compared to 74.7%74.8% for the prior-year period. Gross profit as a percentageThe gross margin of revenue forour core Nu Skin increased 2.3business declined 1.3 percentage points to 78.6% for76.5%. The decline in our gross margin is predominately attributed to an increase in sales promotions during the third quarter of 2021 and increased 1.0 percentage points to 78.2% for the first nine months of 2021. Our Nu Skin gross profit benefitted from a favorable product mix, along with lower freight as a percentage of revenue, as during 2020 in order to meet high demand we utilized more costly express shipments.period.
Selling expenses
Selling expenses as a percentage of revenue remained consistent at 39.9% for the third quarter, and decreased to 39.9%was 40.1% for the first nine monthsquarter of 2021,2022, compared to 40.1%40.8% for the prior-year period. CoreSelling expenses for our core Nu Skin selling expensesbusiness as a percentage of revenue increased 0.3decreased 0.7 percentage points to 42.7% for the third quarter of 2021 and increased 0.2 percentage points to 42.8%43.0% for the first nine monthsquarter of 2021. 2022. 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 fluctuatefluctuates plus or minus approximately 100 basis points from period to period.
General and administrative expenses
General and administrative expenses decreased to $161.1 million in the third quarter of 2021, compared to $165.1 million in the prior-year period and increased to $499.8$148.6 million in the first nine monthsquarter of 2021,2022, compared to $466.2$167.6 million in the prior-year period. The $33.6$19.0 million increase for the first nine months of 2021 was partially attributable to approximately $11.3decline is primarily from a $12.4 million contraction in increased IT expenses, associated with our cloud transition and ongoing development of digital tools, approximately $5.0 million in higher depreciation which is partially attributable to manufacturing capacity expansions, $3.1 million associated with market distributor events held during the year, and miscellaneous increases due to increased revenue. The $4.0 million decrease for the third quarter is mainly driven by lower labor expenses due tofrom lower employee performance incentive compensation, partially offset byalong with our fourth quarter 2021 exit of the increase in IT expenses and depreciation, as discussed above.Grow Tech segment, which led to $6.1 million less expense for the first quarter of 2022. General and administrative expenses as a percentage of revenue increaseddeclined to 25.1% for the third quarter of 2021, from 23.5% for the prior-year period, and decreased to 24.7%24.6% for the first nine monthsquarter of 2021,2022 from 25.4%24.8% for the prior-year period.
Other income (expense), net
Other income (expense), net was $2.8 million for the third quarter of 2021 compared to $0.5 million for the prior-year period, and $0.4 million for the first nine monthsquarter of 20212022, was $1.5 million in expense compared to $(4.1)$1.6 million of income for the prior-year period.same period in 2021. The increase in other expense is largely attributable to unrealized investment income for the thirdfirst quarter and first nine months of 2021, is predominately from $18.1 million of unrealized equity investments income, partially offset by $10.7 million loss on disposal of assets, primarily attributable to our current initiative to right-size our physical footprint and optimize our physical occupancy. See Note 7 to the consolidated financial statements contained in this report for more information on the unrealized equity investments income. In addition, we incurred $3.1 million and $5.5 million in losses from unfavorable foreign currency fluctuations for the three- and nine-month periods ending September 30, 2021, compared to a gain of $0.2 million and a loss of $1.2 million, for the comparable periods.2021.
Provision for income taxes
Provision for income taxes for the three- and nine-month periodsfirst quarter of 20212022 was $18.4 million and $57.5$12.0 million, compared to $18.4 million and $46.9$17.1 million for the prior-year periods.period. The effective tax rates for the three- and nine-month periods were 27.0% and 26.9%rate was 23.6% of pre-tax book income during the first quarter of 2022 compared to 24.7% and 28.5%26.5% in the prior-year periods. The increase in the effective tax rate for the third quarter is primarily due to the prior year statute limitations expiration for an uncertain tax position.period. The decrease in the effective tax rate for the first nine monthsquarter of 20212022 primarily reflects the strong growth in the U.S. market, and Manufacturing segment, which enabled us to utilize additional foreign tax credits to offset the U.S. income taxes.
Net income
As a result of the foregoing factors, net income for the thirdfirst quarter of 20212022 was $49.7$38.7 million compared to $56.3$47.4 million in the prior-year period. Net income for the first nine months of 2021 was $156.5 million, compared to $117.9 million for the first nine months of 2020.
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, and debt repayment and the development of operations in new markets.repayment. 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. In the first ninethree months of 2021,2022, we generated $32.1$7.5 million in cash from operations, compared to $284.4$18.9 million inof cash fromused in operations during the prior-year period. The decreaseincrease in cash flow from operations primarily reflects an approximate $144.9$17.2 million decline in inventory during the period, compared to an inventory increase of $53.8 million in the prior year period, partially offset by the lower revenue and an increase in inventory partially attributable to our strategic decision to carry more inventory to meet customer demand for our new products and build some protectionaccounts receivable from potential supply chain disruptions, along withhigher sales during the first quarter of 2021 payoutbackend of the accrued commission and accrued employee incentive payments attributable to our fourth-quarter growth.quarter. Cash and cash equivalents, including current investments, as of September 30, 2021March 31, 2022 and December 31, 20202021 were $301.6$317.5 million and $423.9$354.8 million, respectively, with the decrease being driven by purchases of property and equipment, as discussed below, our quarterly dividend payments, stock repurchases and acquisitions, partially offset by increased net borrowings underpayment on liabilities associated with our revolving credit facility.fourth quarter restructuring.
Working capital. As of September 30, 2021,March 31, 2022, working capital was $350.3$354.8 million, compared to $360.3$343.3 million as of December 31, 2020.2021. The declineincrease in working capital is primarily attributable to a net $52.5$21.0 million increase in borrowings under our revolving credit facility duringprepaid expenses and other, primarily from an increase in prepaid income tax, and a $28.5 million decrease in accrued expenses from the first halfquarter pay-out of the year to fund our acquisitionsrestructuring cost and stock repurchases and other expenses for operations,employee incentive accruals, partially offset by increased inventorydeclines in cash and higher prepaid assets primarily attributable to prepaid income tax.cash equivalents and inventory.
Capital expenditures. Capital expenditures for the ninethree months ended September 30, 2021March 31, 2022 were $50.4$10.3 million. We expect that our capital expenditures in 20212022 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; |
| ● | the expansion and upgrade of facilities in our various markets; and |
| ● | a new manufacturing plant in Mainland ChinaChina. |
We estimate that capital expenditures for the uses listed above will total approximately $80–95$85–105 million for 2021.2022. We are currently in the building phaseexpecting to complete construction of the new manufacturing plant in Mainland China. To dateChina in the back half of 2022. As of March 31, 2022, we have spent approximately $30.5$40.3 million on this project, with $3.0 million in the first quarter of 2022, and expect that our expenditures for this project will total approximately $55$52-57 million, over the next year, including approximately $25-30$15-20 million during 2021.2022.
Credit Agreement. In April 2018, we entered into a 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 million revolving credit facility, each with a term of five years. We used the proceeds of the term loan and the draw on the revolving facility to pay off the previous credit agreement, and the outstanding balance on the convertible notes. The interest rate applicable to the facilities is subject to adjustments based on our consolidated leverage ratio. The term loan facility amortizes 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 Credit Agreement, with the remainder payable at final maturity. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, we had $75.0$70.0 million and no$70.0 million outstanding borrowings under our revolving credit facility, and $315.0$300.0 million and $337.5$307.5 million remaining balance on our term loan facility. The carrying value of the debt also reflects debt issuance costs of $(1.4)$(1.0) million and $(2.1)$(1.2) million as of September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, 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 March 31, 2022, we were in compliance with all debt covenants under the Credit Agreement. We are planningIn addition, as previously disclosed, we currently plan to refinance our Credit Agreement within the next twelve months.credit facility during 2022.
Derivative Instruments. As of September 30, 2021,March 31, 2022, we had four interest rate swaps, with a total notional principal amount of $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 Credit 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 the first ninethree months of 2021,2022, we repurchased approximately 1.40.2 million shares of our Class A common stock under the plan for $70.4$10.0 million. As of September 30, 2021, $255.4March 31, 2022, $235.4 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. In February May and August 2021,2022, our board of directors declared quarterly cash dividends of $0.38$0.385 per share. TheseThis quarterly cash dividendsdividend of $19.3 million $19.0 million and $19.0 million werewas paid on March 10, 2021, June 9, 2021 and September 8, 20212022 to stockholders of record on February 26, 2021,28, 2022. In May 28, 2021 and August 27, 2021. In November 2021,2022, our board of directors declared a quarterly cash dividend of $0.38$0.385 per share to be paid on DecemberJune 8, 20212022 to stockholders of record on November 26, 2021.May 27, 2022. 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 September 30, 2021March 31, 2022 and December 31, 2020,2021, we held $301.6$317.5 million and $423.9$354.8 million, respectively, in cash and cash equivalents, including current investments. These amounts include $241.8$263.2 million and $374.7$274.9 million as of September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively, held in our operations outside of the U.S. 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 U.S. 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 September 30, 2021,March 31, 2022, we had $32.1$62.7 million in cash denominated in Chinese RMB. We also have experienced delays in repatriating cash from Argentina. As of September 30, 2021March 31, 2022 and December 31, 2020,2021, we had $10.9$12.1 million and $10.6$11.3 million, respectively, in intercompany receivablereceivables with our Argentina subsidiary. We also have intercompany loan arrangements within 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 $60.0 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.
Contingent Liabilities
Please refer to Note 11 to the consolidated financial statements contained in this Quarterly Report for information regarding our contingent liabilities.
Critical Accounting Policies and Estimates
There were no significant changes in our critical accounting policies or estimates during the thirdfirst quarter of 2021.2022.
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, we may 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 may generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue, Sales Leaders and/or Customers during the quarter and can skew year-over-year and sequential comparisons.
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.
Available Information
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.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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 percent, and as of July 1, 2018, we elected to adopt highly inflationary accounting for our subsidiary in Argentina. Under highly inflationary accounting, the functional currency for our subsidiary in Argentina became the U.S. dollar, and the income statement and balance sheet for this subsidiary 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 September 30, 2021,March 31, 2022, our subsidiary in Argentina had a small net peso monetary position. Net sales of our subsidiary in Argentina were less than 2% of our consolidated net sales for the three- and nine-monththree-month periods ended September 30, 2021March 31, 2022 and 2020.2021.
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 September 30,March 31, 2022 and 2021, and 2020, we did not hold material non-designated mark-to-market forward derivative contracts to hedge foreign denominated intercompany positions or third party foreign debt. As of September 30,March 31, 2022, and 2021 and 2020 we did not hold any forward contracts designated as foreign currency cash flow hedges. We continue to evaluate our foreign currency hedging policy.
For additional information about our market risk see Note 9 to the consolidated financial statements contained in this Quarterly Report.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), 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”)). Based on that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of September 30, 2021.March 31, 2022.
Changes in Internal Controls Over Financial Reporting.
We made no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2021March 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
There have been no material developments concerning the matters discussed in the “Legal Proceedings” section of our Annual Report on Form 10-K for the 20202021 fiscal year. Please refer to Note 11 to the consolidated financial statements contained in this report for certain information regarding our legal proceedings.
The information presented below supplements and should be readThere have been no material changes from the risk factors previously disclosed in
conjunction with the detailed discussion of risks associated with our business in our recent SEC filings, including our Annual Report on Form 10-K for the
20202021 fiscal
year and subsequent reports.
year.
Challenges to the form of our network marketing system 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 U.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. The 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 2019, the FTC entered into a settlement with a multi-level marketing company, alleging an illegal business model and compensation structure and inappropriate earnings claims. The company agreed to a prohibition from engaging in multi-level marketing. The FTC and another multi-level company are currently in litigation, and that company has indicated the FTC is seeking to limit the levels of payment in its compensation structure as a condition to settlement.
During 2020, 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 October 2021, the FTC sent a notice to more than 1,100 companies, including us, 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 $43,792 per violation, and there is some ambiguity in how a “violation” would be defined for these purposes.
Although we take steps to educate our Brand Affiliates on proper claims, if our Brand Affiliates 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 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, preferred customers, and Brand Affiliates who have never sponsored other Brand Affiliates, 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, and may in the future, resulted in significant settlements. Allegations 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. 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.
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.
Various government agencies throughout the world regulate direct sales practices. Laws and regulations in the United States, Japan, South Korea and Mainland China are particularly stringent and subject to broad discretion in enforcement by regulators. These laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often referred to as “pyramid schemes,” that compensate participants primarily for recruiting additional participants without significant emphasis on product sales to consumers. The laws and regulations in our current markets often:
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 primarily for selling products and not for recruiting others.
Complying with these widely varying and sometimes inconsistent rules and regulations can be difficult, 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 model and aspects of our sales compensation plan in the markets impacted by such changes and investigations. In June 2021, the U.S. Federal Trade Commission (“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. 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. In addition, markets where we currently do business could change their laws or regulations to prohibit direct selling. If we are unable to obtain necessary licenses and certifications within required deadlines or continue business in existing markets or commence operations in new markets because of these laws, our revenue and profitability may decline. Any delay could negatively impact our revenue.
Improper sales force actions could harm our business.
Sales force activities that violate applicable laws, regulations or policies, or that are alleged to do so, have, and could in the future, harmed our business and reputation and resulted in government or third-party actions against 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. This adverse publicity, as well as a government review and actions that we voluntarily took to address the situation, resulted in 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. Japan imposes strict requirements regarding how Brand Affiliates approach prospective customers. From time to time, we receive information from consumer centers in certain prefectures about the number of general inquiries and complaints about us and our Brand Affiliates. Based on this information, we continually evaluate and enhance our Brand 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 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 October 2021, the FTC sent a notice to more than 1,100 companies, including us, 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 $43,792 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 FTC investigation that resulted in our entering into a consent agreement with the FTC and various agreements with state regulatory agencies. In addition, rulings by the South Korean Fair 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.
In addition, as our sales force increasingly uses social media to promote our business opportunity and products, this increases the burden on us to monitor compliance of such activities and increases the risk that such social media content could contain problematic claims in violation of our policies and applicable regulations.
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 resulting 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 to date, and we could experience more significant interruptions and cost impacts or face more significant closures in the future. 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, the delta variant or other variants have caused some of the pandemic’s negative impacts to worsen or return. 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.
Any significant decline in our operating results in the future could also adversely affect our financial position and liquidity. Under the terms of our existing 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 in the future as a result of the COVID-19 pandemic 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 the acceleration of our obligations, which would have a material adverse effect on our financial condition and liquidity.
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 and 2021, the FTC has issued letters warning 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. Although we take steps to educate our Brand Affiliates on proper claims, if our Brand Affiliates 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 and reputation.
Difficult economic conditions could harm our business.
Difficult economic conditions, such as high unemployment levels, inflation, or recession, could adversely affect our business by causing a decline in demand for our products, particularly if the economic conditions are prolonged or worsen. For example, an increase in oil prices would likely cause our shipping expenses to increase, which would negatively affect our profitability. In addition, economic conditions may adversely impact access to capital for us and our suppliers, may decrease the ability of our sales force and consumers to obtain or maintain credit cards, and may otherwise adversely impact our operations and overall financial condition. There also appears to be increased concerns about potential inflationary pressures, which could have a negative impact on our business if it impacts the discretionary spending of our consumers.
Our business could be negatively impacted by corporate citizenship and sustainability matters.
There are increased expectations and focus from certain investors, Brand Affiliates, consumers, employees 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 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.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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) | |
| | | | | | | | | | | | |
July 1 - 31, 2021 | | | 56,955 | | | $ | 54.73 | | | | 56,955 | | | $ | 262.3 | |
August 1 - 31, 2021 | | | 132,308 | | | | 52.06 | | | | 132,308 | | | $ | 255.4 | |
September 1 - 30, 2021 | | | — | | | | — | | | | — | | | $ | 255.4 | |
Total | | | 189,263 | | | $ | 52.87 | | | | 189,263 | | | | | |
| | (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) | |
| | | | | | | | | | | | |
January 1 - 31, 2022 | | | 68,636 | | | $ | 52.14 | | | | 68,636 | | | $ | 241.8 | |
February 1 - 28, 2022 | | | 74,732 | | | | 50.88 | | | | 74,732 | | | $ | 238.0 | |
March 1 - 31, 2022 | | | 57,120 | | | | 45.97 | | | | 57,120 | | | $ | 235.4 | |
Total | | | 200,488 | | | $ | 49.91 | | | | 200,488 | | | | | |
(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. |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
None.
Exhibits Regulation S-K Number | | Description |
| | |
| | Certification by Ryan S. Napierski, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification by Mark H. Lawrence, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification by Ryan S. Napierski, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | Certification by Mark H. Lawrence, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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) |
Pursuant to the requirements 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.
November 3, 2021May 4, 2022
NU SKIN ENTERPRISES, INC. |
| |
By: | /s/ Mark H. Lawrence | |
| Mark H. Lawrence | |
| Chief Financial Officer | |
| (Duly Authorized Officer and Principal Financial Officer) | |
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