NU SKIN ENTERPRISES, INC. [NUS] Filings

10-Q 1 brhc10036938_10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________

Commission File Number: 001-12421

	NU SKIN ENTERPRISES, INC.
	(Exact name of registrant as specified in its charter)

Delaware		87-0565309
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

	75 West Center Street Provo, Utah 84601
	(Address of principal executive offices, including zip code)

	(801) 345-1000
	(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Class A Common Stock, $.001 par value		NUS		New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of April 30, 2022, 50,208,228 shares of the registrant’s Class A common stock, $.001 par value per share, were outstanding.

NU SKIN ENTERPRISES, INC.

QUARTERLY REPORT ON FORM 10-Q – FIRST QUARTER 2022

TABLE OF CONTENTS

			Page
Part I.	Financial Information
	Item 1.	Financial Statements (Unaudited):
		Consolidated Balance Sheets	1
		Consolidated Statements of Income	2
		Consolidated Statements of Comprehensive Income	3
		Consolidated Statements of Stockholders’ Equity	4
		Consolidated Statements of Cash Flows	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
	Item 4.	Controls and Procedures	25

Part II.	Other Information
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 3.	Defaults Upon Senior Securities	26
	Item 4.	Mine Safety Disclosures	26
	Item 5.	Other Information	26
	Item 6.	Exhibits	27

	Signature		28

In this Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United States (“U.S.”) dollars.

Nu Skin, Pharmanex, and ageLOC are our trademarks. The italicized product names used in this Quarterly Report on Form 10-Q are product names and also, in certain cases, our trademarks.

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PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

NU SKIN ENTERPRISES, INC.

Consolidated Balance Sheets (Unaudited)

(U.S. dollars in thousands)

	March 31, 2022			December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	302,216		$	339,593
Current investments		15,313			15,221
Accounts receivable, net		52,171			41,299
Inventories, net		381,585			399,931
Prepaid expenses and other		97,923			76,906
Total current assets		849,208			872,950

Property and equipment, net		448,822			453,674
Operating lease right-of-use assets		132,949			120,973
Goodwill		206,432			206,432
Other intangible assets, net		74,874			76,991
Other assets		179,964			175,460
Total assets	$	1,892,249		$	1,906,480

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	40,719		$	49,993
Accrued expenses		343,737			372,201
Current portion of long-term debt		110,000			107,500
Total current liabilities		494,456			529,694

Operating lease liabilities		100,844			88,759
Long-term debt		258,995			268,781
Other liabilities		103,754			106,474
Total liabilities		958,049			993,708

Commitments and contingencies (Notes 5 and 11)

Stockholders’ equity:
Class A common stock – 500 million shares authorized, $0.001 par value, 90.6 million shares issued		91			91
Additional paid-in capital		599,258			601,703
Treasury stock, at cost – 40.4 million and 40.7 million shares		(1,526,778	)		(1,526,860	)
Accumulated other comprehensive loss		(69,528	)		(73,896	)
Retained earnings		1,931,157			1,911,734
Total stockholders’ equity		934,200			912,772
Total liabilities and stockholders’ equity	$	1,892,249		$	1,906,480

The accompanying notes are an integral part of these consolidated financial statements.

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NU SKIN ENTERPRISES, INC.

Consolidated Statements of Income (Unaudited)

(U.S. dollars in thousands, except per share amounts)

	Three Months Ended March 31,
	2022			2021
Revenue	$	604,899		$	677,026
Cost of sales		161,499			170,566
Gross profit		443,400			506,460

Operating expenses:
Selling expenses		242,699			275,965
General and administrative expenses		148,556			167,582
Total operating expenses		391,255			443,547

Operating income		52,145			62,913
Other income (expense), net		(1,453	)		1,582

Income before provision for income taxes		50,692			64,495
Provision for income taxes		11,976			17,065

Net income	$	38,716		$	47,430

Net income per share (Note 6):
Basic	$	0.77		$	0.94
Diluted	$	0.76		$	0.91

Weighted-average common shares outstanding (000s):
Basic		49,991			50,706
Diluted		51,066			52,172

The accompanying notes are an integral part of these consolidated financial statements.

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NU SKIN ENTERPRISES, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(U.S. dollars in thousands)

	Three Months Ended March 31,
	2022			2021
Net income	$	38,716		$	47,430

Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment, net of taxes of $(7) and $(2) for the three months ended March 31, 2022 and 2021, respectively		(1,960	)		(9,919	)
Net unrealized gains/(losses) on foreign currency cash flow hedges, net of taxes of $(1,743) and $(839) for the three months ended March 31, 2022 and 2021, respectively		6,314			3,040
Reclassification adjustment for realized losses/(gains) in current earnings, net of taxes of $(4) and $(6) for the three months ended March 31, 2022 and 2021, respectively		14			21
		4,368			(6,858	)
Comprehensive income	$	43,084		$	40,572

The accompanying notes are an integral part of these consolidated financial statements.

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NU SKIN ENTERPRISES, INC.

Consolidated Statements of Stockholders’ Equity (Unaudited)

(U.S. dollars in thousands)

	For the Three Months Ended March 31, 2022
	Class A Common Stock		Additional Paid-in Capital			Treasury Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balance at January 1, 2022	$	91	$	601,703		$	(1,526,860	)	$	(73,896	)	$	1,911,734		$	912,772

Net income		—		—			—			—			38,716			38,716
Other comprehensive income, net of tax		—		—			—			4,368			—			4,368
Repurchase of Class A common stock (Note 6)		—		—			(10,006	)		—			—			(10,006	)
Exercise of employee stock options (0.4 million shares)/vesting of stock awards		—		(6,572	)		10,088			—			—			3,516
Stock-based compensation		—		4,127			—			—			—			4,127
Cash dividends		—		—			—			—			(19,293	)		(19,293	)
Balance at March 31, 2022	$	91	$	599,258		$	(1,526,778	)	$	(69,528	)	$	1,931,157		$	934,200

	For the Three Months Ended March 31, 2021
	Class A Common Stock		Additional Paid-in Capital			Treasury Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balance at January 1, 2021	$	91	$	579,801		$	(1,461,593	)	$	(64,768	)	$	1,840,740		$	894,271

Net income		—		—			—			—			47,430			47,430
Other comprehensive loss, net of tax		—		—			—			(6,858	)		—			(6,858	)
Repurchase of Class A common stock (Note 6)		—		—			(50,406	)		—			—			(50,406	)
Exercise of employee stock options (0.3 million shares)/vesting of stock awards		—		(7,400	)		6,923			—			—			(477	)
Stock-based compensation		—		6,803			—			—			—			6,803
Cash dividends		—		—			—			—			(19,289	)		(19,289	)
Balance at March 31, 2021	$	91	$	579,204		$	(1,505,076	)	$	(71,626	)	$	1,868,881		$	871,474

The accompanying notes are an integral part of these consolidated financial statements.

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NU SKIN ENTERPRISES, INC.

Consolidated Statements of Cash Flows (Unaudited)

(U.S. dollars in thousands)

	Three Months Ended March 31,
	2022			2021
Cash flows from operating activities:
Net income	$	38,716		$	47,430
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization		17,130			18,344
Non-cash lease expense		10,581			13,298
Stock-based compensation		4,127			6,803
Foreign currency losses		370			970
Loss on disposal of assets		517			506
Deferred taxes		3,292			3,363
Changes in operating assets and liabilities:
Accounts receivable, net		(12,463	)		436
Inventories, net		17,212			(53,776	)
Prepaid expenses and other		(18,110	)		(19,241	)
Other assets		941			(2,786	)
Accounts payable		(5,663	)		1,869
Accrued expenses		(40,270	)		(36,779	)
Other liabilities		(8,839	)		707
Net cash provided by/(used in) operating activities		7,541			(18,856	)

Cash flows from investing activities:
Purchases of property and equipment		(10,279	)		(19,373	)
Proceeds on investment sales		4,076			7,550
Purchases of investments		(3,930	)		(6,973	)
Net cash used in investing activities		(10,133	)		(18,796	)

Cash flows from financing activities:
Exercise of employee stock options and taxes paid related to the net shares settlement of stock awards		3,516			(477	)
Payment of cash dividends		(19,293	)		(19,289	)
Repurchases of shares of common stock		(10,006	)		(50,406	)
Finance lease principal payments		(476	)		(483	)
Payments of debt		(7,500	)		(17,500	)
Proceeds from debt		—			70,000
Net cash used in financing activities		(33,759	)		(18,155	)

Effect of exchange rate changes on cash		(1,026	)		(7,777	)

Net increase (decrease) in cash and cash equivalents		(37,377	)		(63,584	)

Cash and cash equivalents, beginning of period		339,593			402,683

Cash and cash equivalents, end of period	$	302,216		$	339,099

The accompanying notes are an integral part of these consolidated financial statements.

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NU SKIN ENTERPRISES, INC.

Notes to Consolidated Financial Statements

1.	The Company

Nu Skin Enterprises, Inc. (the “Company”) is a holding company, with Nu Skin, being the primary operating unit. Nu Skin develops and distributes premium-quality, innovative beauty 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 nine segments, consisting of its seven geographic Nu Skin segments—Mainland China; Americas, which includes Canada, Latin America and the United States; South Korea; Southeast Asia/Pacific, which includes Australia, Indonesia, Malaysia, New Zealand, the Philippines, Singapore, Thailand and Vietnam; Europe, Middle East and Africa (“EMEA”), which includes markets in Europe as well as Israel and South Africa; Japan; and Hong Kong/Taiwan, which also includes Macau—and two Rhyz Investments segments—Manufacturing, which includes manufacturing and packaging subsidiaries it has acquired; and Rhyz other, which includes other investments by its Rhyz strategic investment arm (the Company’s subsidiaries operating within each segment are collectively referred to as the “Subsidiaries”).

2.	Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited consolidated financial statements include the accounts of the Company and its Subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial information as of March 31, 2022, and for the three-month periods ended March 31, 2022 and 2021. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. The consolidated balance sheet as of December 31, 2021 has been prepared using information from the audited financial statements at that date. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current presentation. The Company reclassified $2.2 million of events and other miscellaneous selling costs from the general and administration expenses line to the selling expenses line on the consolidated statement of income for the first quarter of 2021. The Company believes these costs are better reflected in selling expenses. The reclassification had no impact on operating income for the first quarter of 2021.

Accounting Pronouncements

In March 2020, the FASB issued, ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for the effects of reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying US GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in ASU 2020-04 are elective and are effective upon issuance for all entities. The Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

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Inventory

Inventories consist of the following (U.S. dollars in thousands):

	March 31, 2022		December 31, 2021
Raw materials	$	163,746	$	179,891
Finished goods		217,839		220,040
Total Inventory, net	$	381,585	$	399,931

Revenue Recognition

Contract Liabilities – Customer Loyalty Programs

Contract liabilities, recorded as deferred revenue within the accrued expenses line in the 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.

The balance of deferred revenue related to contract liabilities as of March 31, 2022 and December 31, 2021 was $20.8 million and $22.0 million, respectively. The contract liabilities impact to revenue for the three-month periods ended March 31, 2022, and 2021 was an increase of $1.2 million and a decrease of $1.6 million, respectively.

Goodwill

The Company’s reporting units for goodwill are its operating segments, which are also its reportable segments.

The following table presents goodwill allocated to the Company’s reportable segments for the periods ended March 31, 2022 and December 31, 2021 (U.S. dollars in thousands):

	March 31, 2022		December 31, 2021
Nu Skin
Mainland China	$	32,179	$	32,179
Americas		9,449		9,449
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

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Debt

Credit Agreement

On April 18, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”) with several financial institutions as lenders and Bank of America, N.A., as administrative agent. The Credit Agreement provides for a $400 million term loan facility and a $350 million revolving credit facility, each with a term of five years. Both facilities bear interest at the LIBOR, plus a margin based on the 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. The Credit Agreement requires the Company 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. As of March 31, 2022, the Company was in compliance with all covenants under the Credit Agreement.

The following table summarizes the Company’s debt facilities as of March 31, 2022 and December 31, 2021:

Facility or Arrangement

Original

Principal Amount

Balance as of

March 31, 2022 ⁽¹⁾⁽²⁾

Balance as of

December 31, 2021⁽¹⁾⁽²⁾

Interest Rate

Repayment Terms

Credit Agreement term loan facility

400.0 million

300.0 million

307.5 million

Variable 30 day: 2.21%

35% of the principal amount is payable in increasing quarterly installments over a five-year period that began on June 30, 2018, with the remainder payable at the end of the five-year term.

Credit Agreement revolving credit facility

70.0 million

Variable 30 day: 2.15%

Revolving line of credit expires April 18, 2023.

(1)	As of March 31, 2022 and December 31, 2021, the current portion of the Company’s debt (i.e. becoming due in the next 12 months) included $40.0 million and $37.5 million, respectively, of the balance of its term loan under the Credit Agreement.

(2)	The carrying value of the debt reflects the amounts stated in the above table, less debt issuance costs of $1.0 million and $1.2 million as of March 31, 2022 and December 31, 2021, respectively, related to the Credit Agreement, which are not reflected in this table.

Leases

As of March 31, 2022, the weighted average remaining lease term was 8.0 and 3.5 years for operating and finance leases, respectively. As of March 31, 2022, the weighted average discount rate was 3.7% and 3.8% for operating and finance leases, respectively.

The components of lease expense were as follows (U.S. dollars in thousands):

	Three Months Ended March 31,
	2022		2021
Operating lease expense
Operating lease cost	$	10,439	$	12,815
Variable lease cost		1,157		1,368
Short-term lease cost		30		339
Sublease income		—		(1,984	)
Finance lease expense
Amortization of right-of-use assets		556		611
Interest on lease liabilities		66		88
Total lease expense	$	12,248	$	13,237

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Supplemental cash flow information related to leases was as follows (U.S. dollars in thousands):

	Three Months Ended March 31,
	2022		2021
Operating cash outflow from operating leases	$	10,405	$	14,149
Operating cash outflow from finance leases	$	68	$	89
Financing cash outflow from finance leases	$	476	$	483
Right-of-use assets obtained in exchange for operating lease obligations	$	23,730	$	10,891
Right-of-use assets obtained in exchange for finance lease obligations	$	—	$	49

Maturities of lease liabilities were as follows (U.S. dollars in thousands):

Year Ending December 31	Operating Leases		Finance Leases
2022	$	28,595	$	1,578
2023		28,298		2,032
2024		21,657		1,924
2025		15,507		1,361
2026		8,559		260
Thereafter		49,766		—
Total		152,382		7,155
Less: Finance charges		19,577		473
Total principal liability	$	132,805	$	6,682

The Company has additional lease liabilities of $0.1 million which have not yet commenced as of March 31, 2022, and as such, have not been recognized on the consolidated balance sheets.

6.	Capital Stock

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. For the three-month periods ended March 31, 2022 and 2021, the only dilutive common shares outstanding relate to the Company’s outstanding stock awards and options. For the three-month periods ended March 31, 2022 and 2021, stock options of 0.1 million and 0.1 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

Dividends

In February 2022, the Company’s board of directors declared a quarterly cash dividend of $0.385 per share. This quarterly cash dividend of $19.3 million was paid on March 9, 2022 to stockholders of record on February 28, 2022. In May 2022, the board of directors declared a quarterly cash dividend of $0.385 per share to be paid on June 8, 2022 to stockholders of record on May 27, 2022.

Repurchase of common stock

During the three-month periods ended March 31, 2022 and 2021, the Company repurchased 0.2 million shares and 1.0 million shares of its Class A common stock under its stock repurchase plans for $10.0 million and $50.4 million, respectively. As of March 31, 2022, $235.4 million was available for repurchases under the Company’s stock repurchase plan.

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7.	Fair Value and Equity Investments

Fair Value

The carrying value of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximates fair values due to the short-term nature of these instruments. The carrying value of debt approximates fair value due to the variable 30-day interest rate. Fair value estimates are made at a specific point in time, based on relevant market information.

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; and

◾

Level 3 – unobservable inputs based on the Company’s own assumptions.

Accounting standards permit companies, at their option, to measure certain financial instruments and other eligible items at fair value. The Company has elected not to apply the fair value option to existing eligible items beyond what is required by US GAAP.

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 March 31, 2022
	Level 1		Level 2		Level 3			Total
Financial assets (liabilities):
Cash equivalents and current investments	$	57,647	$	—	$	—		$	57,647
Derivative financial instruments asset		—		14,664		—			14,664
Life insurance contracts		—		—		46,450			46,450
Contingent consideration		—		—		(10,226	)		(10,226	)
Total	$	57,647	$	14,664	$	36,224		$	108,535

	Fair Value at December 31, 2021
	Level 1		Level 2		Level 3			Total
Financial assets (liabilities):
Cash equivalents and current investments	$	66,477	$	—	$	—		$	66,477
Derivative financial instruments asset		—		6,590		—			6,590
Life insurance contracts		—		—		49,851			49,851
Contingent consideration		—		—		(10,341	)		(10,341	)
Total	$	66,477	$	6,590	$	39,510		$	112,577

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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		(3,401	)		1,153
Purchase and issuances		—			7,016
Sales and settlements		—			(7,016	)
Transfers into Level 3		—			—
Ending balance at March 31	$	46,450		$	46,606

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.

The following table provides a summary of changes in fair value of the Company’s Level 3 contingent consideration (U.S. dollars in thousands):

	2022			2021
Beginning balance at January 1	$	(10,341	)	$	(3,125	)
Additions from acquisitions		—			—
Changes in fair value of contingent consideration		115			(139	)
Ending balance at March 31	$	(10,226	)	$	(3,264	)

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.

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 at each of March 31, 2022 and December 31, 2021. During the three months ended September 30, 2021, the Company recognized $18.1 million upward fair value adjustments, based on the valuation of additional equity issued by the investee which was deemed to be an observable transaction of a similar investment under ASC 321. The third quarter 2021 gain was recorded within Other income (expense), net on the Consolidated Statement of Comprehensive Operations. The upward fair value adjustment represents a nonrecurring fair value measurement based on observable price changes and is classified as a Level 3 fair value measurement.

8.	Income Taxes

Provision for income taxes for the first quarter of 2022 was $12.0 million, compared to $17.1 million for the prior-year period. The effective tax rates for the first quarter 2022 was 23.6% of pre-tax income compared to 26.5% in the prior-year period.

The Company accounts for income taxes in accordance with ASC Topic 740 “Income Taxes.” 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized. The Company had net deferred tax assets of $22.0 million and $24.1 million as of March 31, 2022 and December 31, 2021, respectively.

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The Company evaluates its indefinite reinvestment assertions with respect to foreign earnings for each quarter. For all foreign earnings, the Company accrues the applicable foreign income taxes. For the earnings that have been indefinitely reinvested, the Company does not accrue foreign withholding taxes. Undistributed earnings that the Company has indefinitely reinvested, for which no foreign withholding taxes have been provided, aggregate to $60.0 million as of December 31, 2021. If the amount designated as indefinitely reinvested as of December 31, 2021 was repatriated to the United States, the amount of incremental taxes would be approximately $6.0 million. The Company intends to utilize the indefinitely reinvested offshore earnings to fund foreign investments, specifically capital expenditures.

The Company files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. In 2009, the Company entered into a voluntary program with the IRS called Compliance Assurance Process (“CAP”). The objective of CAP is to contemporaneously work with the IRS to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. As of December 31, 2021, 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. The Company may elect to continue participating in CAP for future tax years; the Company may withdraw from the program at any time. With a few exceptions, the Company is no longer subject to state and local income tax examination by tax authorities for the years before 2018. In major foreign jurisdictions, the Company is generally no longer subject to income tax examinations for years before 2016. However, statutes of limitations in certain countries may be as long as ten years. The Company is currently under examination in certain foreign jurisdictions; however, the outcomes of those reviews are not yet determinable. The Company’s unrecognized tax benefits relate to multiple jurisdictions. Due to potential increases in unrecognized tax benefits from the multiple jurisdictions in which the Company operates, as well as the expiration of various statutes of limitations, it is reasonably possible that the Company’s gross unrecognized tax benefits, net of foreign currency adjustments, may increase in the next 12 months by approximately $1.0 to $2.0 million.

9.	Derivatives and Hedging Activities

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 derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which 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 to 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 exchange 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 variable-rate debt. During the next twelve months, the Company estimates that an additional $3.2 million will be reclassified as a reduction to interest expense.

As of March 31, 2022 and December 31, 2021, the Company had four outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk with a total notional amount of $200 million.

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Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet:

		Fair Values of Derivative Instruments
Derivatives in Cash flow Hedging Relationships:	Balance Sheet Location	March 31, 2022		December 31, 2021
Interest Rate Swap - Asset	Prepaid expenses and other	$	3,207	$	557
Interest Rate Swap - Asset	Other assets	$	11,457	$	6,033

Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income

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
	Three Months Ended
Derivatives in Cash flow	March 31,
Hedging Relationships:	2022		2021
Interest Rate Swaps	$	8,057	$	3,879

		Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
		Three Months Ended
Derivatives in Cash flow	Income Statement	March 31,
Hedging Relationships:	Location	2022		2021
Interest Rate Swaps	Other income (expense), net	$	(18)	$	(27)

10.	Segment Information

The Company reports revenue from nine segments, consisting of its seven geographic Nu Skin segments—Mainland China, Americas, South Korea, Southeast Asia/Pacific, Japan, EMEA, and Hong Kong/Taiwan—and two Rhyz Investments segments—Manufacturing and Rhyz other. The Nu 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 evaluates the Company’s business performance and allocates resources. Reported revenue includes only the revenue generated by sales to external customers.

Profitability by segment as determined under US GAAP is driven primarily by the Company’s transfer 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 move of the Pacific components from the “America/Pacific” operating segment to the “Southeast Asia/Pacific” operating segment to comply with current segment presentation. Prior year segment information has also been recast to reflect the fourth quarter 2021 exit of the Grow Tech segment, which has been recast to Corporate and other expenses.Consolidated financial information is not affected.

The accounting policies of the segments are the same as those described in Note 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.

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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

	Three Months Ended March 31,
(U.S. dollars in thousands)	2022		2021

Nu Skin
Mainland China	$	124,495	$	149,593
Americas		123,580		133,761
Southeast Asia/Pacific		90,236		83,289
South Korea		72,133		81,131
Japan		61,791		69,864
EMEA		52,968		76,180
Hong Kong/Taiwan		38,494		36,345
Other		620		878
Total Nu Skin		564,317		631,041
Rhyz Investments
Manufacturing ⁽¹⁾		40,341		45,985
Rhyz other		241		—
Total Rhyz Investments		40,582		45,985
Total	$	604,899	$	677,026

(1)

The Rhyz Investments Manufacturing segment had $14.6 million and $17.4 million of intersegment revenue for the three-month period ended March 31, 2022 and 2021, respectively. Intersegment revenue is eliminated in the consolidated financial statements, as well as the reported segment revenue in the table above.

Segment Contribution

	Three Months Ended March 31,
(U.S. dollars in thousands)	2022			2021

Nu Skin
Mainland China	$	28,995		$	39,439
Americas		25,123			28,745
Southeast Asia/Pacific		23,406			19,648
South Korea		22,743			26,525
Japan		15,313			17,981
EMEA		3,836			8,896
Hong Kong/Taiwan		8,690			7,348
Nu Skin contribution		128,106			148,582
Rhyz Investments
Manufacturing		3,292			5,826
Rhyz other		(1,046	)		—
Total Rhyz Investments		2,246			5,826
Total segment contribution		130,352			154,408
Corporate and other		(78,207	)		(91,495	)
Operating income		52,145			62,913
Other income (expense)		(1,453	)		1,582
Income before provision for income taxes	$	50,692		$	64,495

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Depreciation and Amortization

	Three Months Ended March 31,
(U.S. dollars in thousands)	2022		2021

Nu Skin
Mainland China	$	2,884	$	3,339
Americas		199		231
Southeast Asia/Pacific		381		354
South Korea		388		990
Japan		277		253
EMEA		230		286
Hong Kong/Taiwan		691		885
Total Nu Skin		5,050		6,338
Rhyz Investments
Manufacturing		3,330		2,688
Rhyz other		592		—
Total Rhyz Investments		3,922		2,688
Corporate and other		8,158		9,318
Total	$	17,130	$	18,344

Capital Expenditures

	Three Months Ended March 31,
(U.S. dollars in thousands)	2022		2021

Nu Skin
Mainland China	$	4,068	$	8,517
Americas		42		112
Southeast Asia/Pacific		68		565
South Korea		362		490
Japan		—		91
EMEA		393		172
Hong Kong/Taiwan		263		—
Total Nu Skin		5,196		9,947
Rhyz Investments
Manufacturing		1,208		3,338
Rhyz other		—		—
Total Rhyz Investments		1,208		3,338
Corporate and other		3,875		6,088
Total	$	10,279	$	19,373

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11.	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. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

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.

12.	Acquisitions

In April 2021, the Company acquired 100% ownership in MyFavoriteThings, Inc. (“Mavely”), making Mavely a wholly 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 the acquisition date was $8.7 million. The Company allocated the gross purchase price of $29.4 million to the assets 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 goodwill is expected to be 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 $0.3 million for other intangibles. The intangibles were assigned useful lives of 8 years for the technology and tradename, 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.

13.	Restructuring

In the fourth quarter 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. As of December 31, 2021, the $20.0 million liability related to the cash charges was recorded within Accrued expenses. During the first quarter of 2022, the Company made cash payments of $11.6 million, leaving an ending restructuring accrual of $8.3 million as of March 31, 2022. The Company expects to pay out the remaining liability in the first half of 2022. The restructuring charges were recorded in the previous Grow Tech segment, which in the current year has been recast to Corporate and Other.

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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 2021 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 2021 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 March 31, 2022 decreased 11% to $604.9 million, compared to $677.0 million in the prior-year period. Our revenue in the first quarter of 2022 was negatively impacted 3% from foreign-currency fluctuations. Our Customers, Paid Affiliates and Sales Leaders declined 13%, 14% and 22%, respectively, on a year-over-year basis.

The declines for the three-month period ended March 31, 2022 were largely driven by COVID-related lockdowns and other factors in our eastern markets along with the continued softening in EMEA. We are looking forward to our product launches, specifically the expected launch of the ageLOC LumiSpa iO in the back half of the year.

Earnings per share for the first quarter of 2022 decreased 16% to $0.76, compared to $0.91 in the prior-year period. The decrease in earnings per share for the quarter is primarily driven by the decline in revenue along with decline in gross margin from sales promotions.

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Segment Results

We report our business in nine segments to reflect our current management approach. These segments consist of our seven geographic Nu Skin segments—Mainland China, Americas, Southeast Asia/Pacific, South Korea, Japan, EMEA and Hong Kong/Taiwan —and our Rhyz Investment segments—Manufacturing and Rhyz other. The Nu Skin Other category includes miscellaneous corporate revenue and related adjustments.

The following table sets forth revenue for the three-month periods ended March 31, 2022 and 2021 for each of our reportable segments (U.S. dollars in thousands):

Three Months Ended

March 31,

Constant-Currency

2022

2021

Change