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, acquisitions and the integration of acquisition targets, 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 or related to 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 20212022 fiscal year and in any of our subsequent quarterlySecurities and other reports, including this Quarterly Report.Exchange Commission filings.
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 20212022 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 June 30, 20222023 decreased 20%11% to $560.6$500.3 million, compared to $704.1$560.6 million in the prior-year period, and revenue for the six-month period ended June 30, 20222023 decreased 16% to $1.2$1.0 billion, compared to $1.4$1.2 billion in the prior-year period. Our revenue in the second quarter and first halfsix months of 2022 was negatively impacted 5%3% and 4%, respectively, from foreign-currency fluctuations. Our Customers, Paid Affiliates and Sales Leaders declined 6%25%, 16%23% and 24%9%, respectively, on a year-over-year basis.
OurThe declines in our second quarter and first half of 20222023 revenue was softer than anticipated primarilywere largely driven by COVID-related factorscontinued macroeconomic pressures we’ve been facing in Mainland China, distractionsour markets. During the second quarter we began the launch process for ageLOC TRMe,our new personalized approach to weight management, which generated approximately $12.7 million in EMEA relatedrevenue. In the third quarter of 2023, we plan to begin our launch process for our next smart connected device system, ageLOC WellSpa iO, with limited previews starting in select markets, followed by majority of our markets launching in the ongoing conflict in Russiafourth quarter of 2023 and Ukraine, and the general global economic downturn. Despite these continuing headwinds, we are optimistic about our EmpowerMe personalized beauty and wellness strategy with the expected launch ofremainder continuing throughout the ageLOC LumiSpa iO in the backfirst half of 2024. We currently anticipate ageLOC WellSpa iO sales will generate approximately $70-90 million for the year.second half of 2023.
Earnings per share for the second quarter of 20222023 decreased 42%19% to $0.67,$0.54, compared to $1.15$0.67 in the prior-year period. Earnings per share for the first six months of 20222023 decreased 31%47% to $1.43,$0.76, compared to $2.06$1.43 in the prior-year period. The decrease in earnings per share for the second quarter and first half of 2022 was2023 is primarily driven by the decrease in revenue along with a decline in gross margin from sales promotions.revenue. The decline in earnings per share for the first half of 2023 was also impacted by our $9.8 million of restructuring charges incurred in the first quarter of 2023.
In August 2022, management approved a restructuring plan for the second half of 2022. The charges are expected to be approximately $30 million for the third quarter of 2022 and $35–$45 million for the second half of 2022. These charges will predominantly be recorded in restructuring and impairment, as part of operating income. The plan includes approximately $30–$35 million of cash charges related to severance and lease termination cost and approximately $5–$10 million of non-cash impairment charges of fixed assets related to the footprint optimization.
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—Americas, Mainland China, Southeast Asia/Pacific, South Korea, Japan, EMEA,Europe & Africa, 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 Rhyz other segment includes other investments by our Rhyz strategic investment arm, which were entered into during the second quarter of 2021.2021 and 2023. Our Europe & Africa segment was previously EMEA, but was changed following the June 2023 closure of the Israel market.
The following table sets forth revenue for the three- and six-month periods ended June 30, 20222023 and 20212022 for each of our reportable segments (U.S. dollars in thousands):
| | Three Months Ended June 30, | | | | Constant- Currency | | | Six Months Ended June 30, | | | | Constant- Currency | | | Three Months Ended June 30, | | | | Constant- Currency | | | Six Months Ended June 30, | | | | Constant- Currency | |
| | 2022 | | 2021 | | Change | | | Change(1) | | 2022 | | 2021 | | Change | | | Change(1) | | | 2023 | | 2022 | | Change | | | Change(1) | | 2023 | | 2022 | | Change | | | Change(1) | |
Nu Skin | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 124,445 | | | $ | 138,512 | | | (10 | )% | | (9 | )% | | $ | 248,025 | | | $ | 272,273 | | | (9 | )% | | (8 | )% | | $ | 107,641 | | | $ | 124,445 | | | (14 | )% | | (10 | )% | | $ | 208,798 | | | $ | 248,025 | | | (16 | )% | | (12 | )% |
Mainland China | | 86,808 | | | 154,182 | | | (44 | )% | | (42 | )% | | 211,303 | | | 303,775 | | | (30 | )% | | (31 | )% | | 88,362 | | | 86,808 | | | 2 | % | | 8 | % | | 156,338 | | | 211,303 | | | (26 | )% | | (21 | )% |
Southeast Asia/Pacific | | 94,067 | | | 83,968 | | | 12 | % | | 16 | % | | 184,303 | | | 167,257 | | | 10 | % | | 14 | % | | 63,764 | | | 94,067 | | | (32 | )% | | (30 | )% | | 131,574 | | | 184,303 | | | (29 | )% | | (26 | )% |
South Korea | | 69,308 | | | 88,604 | | | (22 | )% | | (12 | )% | | 141,441 | | | 169,735 | | | (17 | )% | | (8 | )% | | 53,686 | | | 69,308 | | | (23 | )% | | (19 | )% | | 124,010 | | | 141,441 | | | (12 | )% | | (8 | )% |
Japan | | 55,952 | | | 68,020 | | | (18 | )% | | (3 | )% | | 117,743 | | | 137,884 | | | (15 | )% | | (3 | )% | | 50,862 | | | 55,952 | | | (9 | )% | | (4 | )% | | 103,468 | | | 117,743 | | | (12 | )% | | (3 | )% |
EMEA | | 50,871 | | | 83,115 | | | (39 | )% | | (31 | )% | | 103,839 | | | 159,295 | | | (35 | )% | | (28 | )% | |
Europe & Africa | | | 46,968 | | | 50,871 | | | (8 | )% | | (9 | )% | | 94,412 | | | 103,839 | | | (9 | )% | | (8 | )% |
Hong Kong/Taiwan | �� | | 39,327 | | | 38,529 | | | 2 | % | | 6 | % | | 77,821 | | | 74,874 | | | 4 | % | | 6 | % | | 37,108 | | | 39,327 | | | (6 | )% | | (3 | )% | | 71,656 | | | 77,821 | | | (8 | )% | | (4 | )% |
Nu Skin other | | | 1,318 | | | | 947 | | | 39 | % | | 39 | % | | | 1,938 | | | | 1,825 | | | 6 | % | | 6 | % | | | 597 | | | | 1,318 | | | (55 | )% | | (55 | )% | | | 482 | | | | 1,938 | | | (75 | )% | | (75 | )% |
Total Nu Skin | | 522,096 | | | 655,877 | | | (20 | )% | | (15 | )% | | 1,086,413 | | | 1,286,918 | | | (16 | )% | | (12 | )% | | 448,988 | | | 522,096 | | | (14 | )% | | (11 | )% | | 890,738 | | | 1,086,413 | | | (18 | )% | | (14 | )% |
Rhyz Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Manufacturing | | 38,229 | | | 48,140 | | | (21 | )% | | (21 | )% | | 78,570 | | | 94,125 | | | (17 | )% | | (17 | )% | | 45,551 | | | 38,229 | | | 19 | % | | 19 | % | | 81,318 | | | 78,570 | | | 3 | % | | 3 | % |
Rhyz other | | | 290 | | | | 38 | | | 663 | % | | 663 | % | | | 531 | | | | 38 | | | 1,297 | % | | 1,297 | % | | | 5,718 | | | | 290 | | | 1,872 | % | | 1,872 | % | | | 9,663 | | | | 531 | | | 1,720 | % | | 1,720 | % |
Total Rhyz Investments | | | 38,519 | | | | 48,178 | | | (20 | )% | | (20 | )% | | | 79,101 | | | | 94,163 | | | (16 | )% | | (16 | )% | | | 51,269 | | | | 38,519 | | | 33 | % | | 33 | % | | | 90,981 | | | | 79,101 | | | 15 | % | | 15 | % |
Total | | $ | 560,615 | | | $ | 704,055 | | | (20 | )% | | (15 | )% | | $ | 1,165,514 | | | $ | 1,381,081 | | | (16 | )% | | (12 | )% | | $ | 500,257 | | | $ | 560,615 | | | (11 | )% | | (8 | )% | | $ | 981,719 | | | $ | 1,165,514 | | | (16 | )% | | (12 | )% |
(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 six-month periods ended June 30, 20222023 and 20212022 for each of our reportable segments (U.S. dollars in thousands). Segment contribution excludes certain intercompany charges, specifically royalties, license fees, transfer pricing and other miscellaneous items. We use segment contribution to measure the portion of profitability that the segment managers have the ability to control for their respective segments. The prior year segment contribution has been recast for the fourth quarter of 2021 exit of the Grow Tech segment and the expense has been recastdue to Corporate and other.a change in how we allocate certain corporate costs. Consolidated financial information was not affected. 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 June 30, | | | | | | Six Months Ended June 30, | | | | | | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change | | | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change | |
Nu Skin | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 30,026 | | | $ | 28,998 | | | 4 | % | | $ | 55,149 | | | $ | 57,743 | | | (4 | )% | | $ | 28,853 | | | $ | 26,729 | | | 8 | % | | $ | 45,103 | | | $ | 48,680 | | | (7 | )% |
Mainland China | | 12,945 | | | 51,480 | | | (75 | )% | | 41,940 | | | 90,919 | | | (54 | )% | | 19,357 | | | 12,945 | | | 50 | % | | 32,969 | | | 41,940 | | | (21 | )% |
Southeast Asia/Pacific | | 24,367 | | | 21,213 | | | 15 | % | | 47,773 | | | 40,861 | | | 17 | % | | 11,396 | | | 21,997 | | | (48 | )% | | 23,867 | | | 42,993 | | | (44 | )% |
South Korea | | 20,578 | | | 28,892 | | | (29 | )% | | 43,321 | | | 55,417 | | | (22 | )% | | 17,391 | | | 19,828 | | | (12 | )% | | 40,966 | | | 41,826 | | | (2 | )% |
Japan | | 13,451 | | | 16,461 | | | (18 | )% | | 28,764 | | | 34,442 | | | (16 | )% | | 12,508 | | | 12,667 | | | (1 | )% | | 25,416 | | | 27,087 | | | (6 | )% |
EMEA | | 6,162 | | | 13,681 | | | (55 | )% | | 9,998 | | | 22,577 | | | (56 | )% | |
Europe & Africa | | | 4,945 | | | 4,867 | | | 2 | % | | 8,583 | | | 7,489 | | | 15 | % |
Hong Kong/Taiwan | | | 9,161 | | | | 8,560 | | | 7 | % | | | 17,851 | | | | 15,908 | | | 12 | % | | | 10,148 | | | | 8,514 | | | 19 | % | | | 17,982 | | | | 16,600 | | | 8 | % |
Total Nu Skin | | 116,690 | | | 169,285 | | | (31 | )% | | 244,796 | | | 317,867 | | | (23 | )% | | 104,598 | | | 107,547 | | | (3 | )% | | 194,886 | | | 226,615 | | | (14 | )% |
Rhyz Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Manufacturing | | 1,188 | | | 6,764 | | | (82 | )% | | 4,480 | | | 12,590 | | | (64 | )% | | 4,218 | | | 1,188 | | | 255 | % | | 2,845 | | | 4,480 | | | (36 | )% |
Rhyz other | | | (1,299 | ) | | | (519 | ) | | (150 | )% | | | (2,345 | ) | | | (519 | ) | | (352 | )% | | | (3,392 | ) | | | (1,299 | ) | | (161 | )% | | | (5,352 | ) | | | (2,345 | ) | | (128 | )% |
Total Rhyz Investments | | $
| (111 | ) | | $
| 6,245 | | | (102 | )% | | $
| 2,135 | | | $
| 12,071 | | | 82 | % | | $ | 826 | | | $ | (111 | ) | | 844 | % | | $ | (2,507 | ) | | $ | 2,135 | | | (217 | )% |
The following tables provide information concerning the number of Customers, Paid Affiliates and Sales Leaders in our core Nu Skin business for the three-month periods ended June 30, 20222023 and 2021. During the first quarter of 2022, in connection with the introduction of the new 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 business. The definition of our Customer metric remained unchanged. We have recast the 2021 Sales Leaders to the new definition.2022.
| ● | “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 members of our sales employees and independent marketersforce 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. |
| | | Three Months Ended June 30, | | | | |
| | Three Months Ended June 30, | | | | | | 2023 | | 2022 | | Change | |
Customers | | 2022 | | 2021 | | Change | | | | | | | | | | |
Americas | | 302,849 | | | 368,052 | | | (18 | )% | | 263,138 | | | 302,849 | | | (13 | )% |
Mainland China | |
| 392,268 | | | 328,526 | | | 19 | % | | 214,907 | | | 392,268 | | | (45 | )% |
Southeast Asia/Pacific | | 152,775 | | | 165,221 | | | (8 | )% | | 106,283 | | | 152,775 | | | (30 | )% |
South Korea | | 135,290 | | | 153,282 | | | (12 | )% | | 112,019 | | | 135,290 | | | (17 | )% |
Japan | | 122,643 | | | 125,734 | | | (2 | )% | | 112,484 | | | 122,643 | | | (8 | )% |
EMEA | | 205,379 | | | 261,881 | | | (22 | )% | |
Europe & Africa | | | 177,472 | | | 205,379 | | | (14 | )% |
Hong Kong/Taiwan | | | 69,411 | | | | 64,861 | | | 7 | % | | | 54,815 | | | | 69,411 | | | (21 | )% |
Total | | | 1,380,615 | | | | 1,467,557 | | | (6 | )% | |
Total Customers | | | | 1,041,118 | | | | 1,380,615 | | | (25 | )% |
| | | | | | | | | | |
Paid Affiliates | | | | | | | | | | |
Americas | | | 36,048 | | | 44,523 | | | (19 | )% |
Mainland China | | | 28,825 | | | 19,257 | | | 50 | % |
Southeast Asia/Pacific | | | 32,769 | | | 41,512 | | | (21 | )% |
South Korea(1) | | | 23,012 | | | 48,605 | | | (53 | )% |
Japan | | | 36,765 | | | 38,269 | | | (4 | )% |
Europe & Africa(1) | | | 19,906 | | | 32,323 | | | (38 | )% |
Hong Kong/Taiwan(1) | | | | 10,327 | | | | 17,644 | | | (41 | )% |
Total Paid Affiliates | | | | 187,652 | | | | 242,133 | | | (23 | )% |
| | | | | | | | | | |
Sales Leaders | | | | | | | | | | |
Americas | | | 7,872 | | | 9,320 | | | (16 | )% |
Mainland China(2) | | | 13,777 | | | 11,458 | | | 20 | % |
Southeast Asia/Pacific | | | 5,814 | | | 8,407 | | | (31 | )% |
South Korea | | | 5,784 | | | 6,557 | | | (12 | )% |
Japan | | | 5,853 | | | 6,097 | | | (4 | )% |
Europe & Africa | | | 4,105 | | | 5,192 | | | (21 | )% |
Hong Kong/Taiwan | | | | 2,602 | | | | 3,054 | | | (15 | )% |
Total Sales Leaders | | | | 45,807 | | | | 50,085 | | | (9 | )% |
| | Three Months Ended June 30, | | | | |
Paid Affiliates | | 2022 | | | 2021 | | | Change | |
Americas | | | 44,523 | | | | 53,492 | | | | (17 | )% |
Mainland China | |
| 19,257 | | | | 39,889 | | | | (52 | )% |
Southeast Asia/Pacific | | | 41,512 | | | | 44,734 | | | | (7 | )% |
South Korea | | | 48,605 | | | | 52,680 | | | | (8 | )% |
Japan | | | 38,269 | | | | 38,623 | | | | (1 | )% |
EMEA | | | 32,323 | | | | 42,682 | | | | (24 | )% |
Hong Kong/Taiwan | | | 17,644 | | | | 17,815 | | | | (1 | )% |
Total | | | 242,133 | | | | 289,915 | | | | (16 | )% |
| | Three Months Ended June 30, | | | | |
Sales Leaders | | 2022 | | | 2021 | | | Change | |
Americas | | | 9,320 | | | | 11,752 | | | | (21 | )% |
Mainland China | |
| 11,458 | | | | 20,946 | | | | (45 | )% |
Southeast Asia/Pacific | | | 8,407 | | | | 8,190 | | | | 3 | % |
South Korea | | | 6,557 | | | | 7,701 | | | | (15 | )% |
Japan | | | 6,097 | | | | 6,057 | | | | 1 | % |
EMEA | | | 5,192 | | | | 8,002 | | | | (35 | )% |
Hong Kong/Taiwan | | | 3,054 | | | | 3,446 | | | | (11 | )% |
Total | | | 50,085 | | | | 66,094 | | | | (24 | )% |
(1) | The June 30, 2023 number is affected by a change in eligibility requirements for receiving certain rewards within our compensation structure, to more narrowly focus on those affiliates who are actively building a consumer base. See “South Korea,” “Europe & Africa,” and “Hong Kong/Taiwan,” below. We plan to implement these changes in additional segments over the next several quarters. |
(2) | The June 30, 2023 number reflects a modified Sales Leader definition. See “Mainland China,” below. |
Following is a narrative discussion of our results in each segment, which supplements the tables above.
Americas. The decline in revenue, Customers, Paid Affiliates and Sales Leaders in our Americas segment for the second quarter and first half of 2023 is predominantly attributable to the continued macro economic challengesdecline in momentum in our North America markets, while our Latin America markets continue to be challenged by macroeconomic issues. In the first quarter of 2023 we have launched our new affiliates rewards and recognition program in North America. In the second quarter of 2023, we implemented our new e-commerce platform in North America and adjusted the structure of our sales compensation in our Latin America markets. Our U.S. market's revenue increased 6%Despite some early difficulties with migration and adoption of the new programs and platforms, we believe these changes will be beneficial for our future growth opportunities. We remain optimistic for our upcoming product launches in the secondAmericas segment, which include products aimed at social selling along with ageLOC WellSpa iO, which we expect to preview with our Sales Leaders in Canada and Latin America by the end of the year. We also expect to preview a similar device in our United States market during the fourth quarter of 2022 and 10% for the first half of 2022 from continued momentum, specifically from the launch of Beauty Focus Collagen+ during the second half of 2021; the recent launch of Nu Biome, our latest wellness product aimed at aiding digestion to help maintain your overall gut health; and continued social adoption.2023, pending regulatory clearance.
The year-over-year increase in segment contribution for the second quarter of 2022 is partially attributable to the2023 primarily reflects a 2.5 percentage point increase in revenuegross margin from favorable product mix as well as less sales discounts in our U.S. market, which has more favorable margins than our Latin American markets. In addition, ourthe period, a 2.5 percentage point decrease in selling expensesexpense as a percentage of revenue decreased 4.5 percentage points, primarily from sales mix, as our products have differing commission percentages assigned to them, all partially offset by a product mix shift to products with a lower commission percentage. In addition, with the declinedecrease in revenue and Sales Leaders, the expense associated with incentive trips decreased as well.revenue. The decline in segment contribution for the first half of 20222023 is primarily attributable tofrom the decline in revenue as well as increased general and higher sales promotionsadministrative expenses in the first quarter of 2022, partially offset by the increase in revenue in our U.S market.
quarter.
Mainland China. Our Mainland China market continued to be challenged during the secondfirst quarter and first half of 2022, with COVID-related lockdowns and other factors negatively impacting our selling and promotional activities. Due to increasing COVID-19 cases, the government implemented more significant lockdowns that precluded gatherings and meetings for the general population in Shanghai and other areas. As previously disclosed, we anticipate that COVID-related challenges will persist throughout 2022. During2023, while during the second quarter we have seen improving trends with a 2% increase in revenue as well as increases in Paid Affiliates and Sales Leaders, while our Customers increased 19% primarily fromdeclined due to prior year customer promotions and launch of digital tools.
During July 2022, we resumed allowing Sales Leader meetings in this market on a limited basis, so long as they are in compliance with government regulations and related controls that we have implemented. In our Quarterly Report on Form 10-Q for the 2022 first quarter, we referenced government inquiries related to a meeting in a hotel in Wuhan, Hubei Province organized by an independent marketer of Nu Skin China. The work on these inquiries was affected by the lockdowns in Mainland China, which delayed the inquiries from being closed during the second quarter; however, we continue to believe we are in the final stages of the process to close these matters. We believe the regulatory environment in Mainland China is becoming increasingly challenging and will continue to be so over the medium and long terms.
The year-over-year decrease in segment contributionpromotion. Our revenue for the second quarter and first half of 2023 was negatively impacted 6% and 5%, respectively, by unfavorable foreign currency fluctuations. During the third quarter of 2022, primarilyas a result of the economic headwinds in the market, we made some modifications to the compensation plan, which provided leaders more flexible requirements to maintain their business. Our Mainland China Sales Leaders number as of June 30, 2023 reflects lower revenue. these modified requirements. We remain optimistic in the potential of our Mainland China market, with our upcoming product launch of ageLOC TRMe.
The decrease also reflects the following: (a) a 5.5 and 3.9 percentage point decreaseyear-over-year increase in gross marginsegment contribution for the second quarter and first half of 2022, respectively,2023 primarily reflects the increase in revenue, a 4.2 percentage point increase in gross margin from increased product promotions and discounts duringfavorable sales mix as well as our prior year period incurred higher cost associated with the second quarter of 2022, along withCOVID related factors, a shift in product mix, where a higher proportion of devices were sold in the period and increased freight charges; (b) an increasedecrease in general and administrative expenses from cost savings realized from our 2022 restructuring plan, as well as a 2.5 percentage of revenue, due to the fixed nature of these expenses; and (c) an increasepoint decrease in selling expenseexpenses 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 decrease in segment contribution for the first half of 2023 is primarily driven by a decline in revenue, partially offset by the second quarter improvements in gross margin and selling expense mentioned above.
Southeast Asia/Pacific. Our Southeast Asia/Pacific segmentThe decline in revenue, increased 12%Customers, Paid Affiliates and 10%Sales Leaders for the second quarter and first half of 2023 is partially attributable to slowing momentum from the general macro-economic factors in the markets along with our recent price increases to address inflation. In addition, in the first half of 2022 respectively, including a 4% negative impact from unfavorable foreign-currency fluctuations for both periods presented. The increase in revenue was partially driven by strong product launches ofwe launched ageLOC Meta (locally referred to as ageLOC Reset in theour Southeast Asia markets), which generated approximately $18.2 million and $31.4 million in revenue for the second quarter and $31.4 million in revenue for the first half of 2022, along with loosening of COVID restrictions inrespectively, compared to $5.2 million and $11.6 million for the markets. Our product launches and promotions during the quarter were focused on re-energizing our existing Sales Leaders, which led to a decline in our Customers and Paid Affiliates.
The year-over-year increase in segment contribution is primarily attributable to higher revenue, along with the fixed nature of general and administrative expenses on increased revenue.
South Korea. The second quarter and first half of 2022 decline in revenue was predominantly driven by a 10% and 9% negative impact from unfavorable foreign-currency fluctuations. Our South Korea segment remained challenged from the ongoing COVID-related issues, leading to declines in revenue, Customers, Paid Affiliates and Sales Leaders.2023, respectively.
The year-over-year decrease in segment contribution is primarily from aattributable to the decline in revenue, along with a 2.02.6 and 1.52.5 percentage point increasedecline in gross margin for the second quarter and first half of 2023, respectively, due to product mix, as well as the fixed nature of general and administrative expenses on lower revenue.
South Korea. Our South Korea market was challenged by difficult macroeconomic trends, including inflationary pressures and our associated price increases which negatively impacted our revenue, Customers, Paid Affiliates and Sales Leaders for the second quarter and first half of 2023. Our Paid Affiliates were also negatively impacted by a change in eligibility requirements for receiving certain rewards within our compensation structure. We estimate the change in eligibility requirements resulted in a reduction of approximately 19 thousand Paid Affiliates for the second quarter of 2023.
The year-over-year decrease in segment contribution primarily reflects the decline in revenue, partially offset by decreases in general and administrative expenses from savings generated by our 2022 restructuring plan and a 2.9 and 1.2 percentage point decline in selling expenses as a percentpercentage of revenue for the second quarter and first half of 2022.2023, respectively. The decreases in our selling expenses for both periods presented are partially from the decline in Sales Leaders, along with adjustments to the compensation structure.
Japan. The decline in revenue is primarily attributable to a 15% and 12% unfavorable foreign-currency fluctuationsfor the second quarter and first half of 2022.
The year-over-year decline in segment contribution2023 is primarily from the decline in revenue.
EMEA. The continued softening of momentum in our EMEA segment, further driven by the current geopolitical Russian/Ukraine conflict which has caused distraction to our sales force in the segment, ledattributable to a decline in5% and 9% negative impact, respectively, from unfavorable foreign-currency fluctuations. In addition, our revenue, Customers, Paid Affiliates, and Sales Leaders. Our reported revenue was alsoLeaders were negatively impacted from foreign-currency fluctuations. We have suspended business operations in Ukraine,by inflationary pressures and are closing our market in Russia. The Russia and Ukraine markets have historically accounted for less than 1% of our consolidated revenue. We look forward to our upcoming product introductionsassociated price increases implemented in the region but remain cautious in the near term given the macro environment.second quarter of 2023.
The year-over-year decline in segment contribution for the second quarter and first half of 2023 reflects the decreased revenue, partially offset by a decline in revenue along with a lower gross margin from unfavorable product mix and increased promotions, and the fixed nature of general and administrative expenses withattributable to savings from our 2022 restructuring plan.
Europe & Africa. The reduction in revenue, Customers, Paid Affiliates and Sales Leaders for the second quarter and first half of 2023 reflects the continued softening of momentum in this segment, as well as macroeconomic factors that have led to a decline in purchasing power of our customers. Our Paid Affiliates were also negatively impacted by a change in eligibility requirements for receiving certain rewards within our compensation structure. We estimate the change in eligibility requirements resulted in a reduction of approximately 5 thousand Paid Affiliates for the second quarter of 2023. Effective June 2023, we closed our Israel market. This market generated $32 thousand and $65 thousand of revenue for the second quarter and first half of 2023, respectively.
The year-over-year increase in segment contribution for the second quarter and first half of 2023 reflects slight increases in gross margin, from favorable sales mix and price increase, partially offset by the decline in revenue.
Hong Kong/Taiwan. Our Hong Kong /TaiwanKong/Taiwan segment revenue increased 2%declined 6% for the second quarter and 8% for the first half of 2023 on a year-over-year basis. Our revenue was negatively impacted 3% for second quarter and 4% for the first half of 2022. The increase2023 from unfavorable foreign-currency fluctuations. Our Paid Affiliates were also negatively impacted by a change in revenue is primarily from revenue growtheligibility requirements for receiving certain rewards within our compensation structure. We estimate the change in our Taiwan market from social selling. Our Customers also increased 7%, fromeligibility requirements resulted in a reduction of approximately 5 thousand Paid Affiliates for the social selling growth in our Taiwan market. Our Hong Kong market continues to be challenged from the ongoing pressures from COVID-19, which led to a decline in Sales Leaders and Paid Affiliates.second quarter of 2023.
The increase in segment contribution for both periods presented, isthe second quarter and first half of 2023 was primarily from the increasedriven by a 2.9 and 1.6 percentage point improvement, respectively, in revenue along with decreases in general and administrative expenses,gross margin from effective cost saving measures.initiatives to reduce freight and overhead cost and a 3.9 and 2.6 percentage point decrease in selling expenses as a percentage of revenue, respectively, from lower incentive trip accruals.
Manufacturing. Our Manufacturing segment revenue declined 21%increased 19% for the second quarter, primarily from the onboarding of new customers and 17%automation efforts to increase efficiencies.
The increase in segment contribution for the second quarter is primarily from the increased revenue and efficiencies gained from automation. The decrease in segment contribution for first half of 2022, primarily due to our customers rebalancing their inventory from higher levels in 2021, reducing demand for the first half of 2022.
The decline in segment contribution2023 is attributable to the lower revenue on fixed costs,in the first quarter.
Rhyz Other. The increase in revenue in our Rhyz other segment is primarily driven by $4.6 million and $8.2 million of growth at our previously acquired social commerce platform for the second quarter and first half of 2023, respectively.
In April 2023, we acquired 60 percent of LifeDNA, Inc. (“LifeDNA”), a DNA assessment company. Consideration paid included $4.0 million of cash, along with the conversion of a previous $3.0 million Simple Agreement for Future Equity (“SAFE”), and a $0.2 million convertible note. In June 2023, we acquired 100 percent ownership in Beauty Biosciences, LLC (“BeautyBio”), a clean and clinically proven skin care and beauty device company. The purchase price for BeautyBio was $75.0 million, net of cash acquired of $1.5 million, all payable in cash. During the second quarter of 2023, we recognized approximately $0.9 million of revenue mix betweenfrom these entities. Because we acquired these entities during the quarter, our manufacturingreported revenue for these entities with different profitability.consists only of the revenue after the acquisition dates, not the full quarter.
Consolidated Results
Revenue
Revenue for the three-month period ended June 30, 20222023 decreased 20%11% to $560.6$500.3 million, compared to $704.1$560.6 million in the prior-year period. Revenue for the six-month period ended June 30, 20222023 decreased 16% to $1.2$1.0 billion compared to $1.4$1.2 billion. Our reported revenue was negatively impacted 5%3% and 4% from foreign-currency fluctuations for the three- and six-month periods ended June 30, 2022,2023, respectively. For a discussion and analysis of these decreases in revenue, see “Overview” and “Segment Results,” above.
Gross profit
Gross profit as a percentage of revenue was 73.6%72.9% for the second quarter of 2022,2023, compared to 75.6%73.6% for the prior-year period, and 73.4%72.6% for the first six months of 2022,2023, compared to 75.2%73.4% for the prior-year period. Gross profit as a percentage of revenue for core Nu Skin decreased 1.3increased 0.2 percentage points to 77.0%77.2% for the second quarter of 20222023 and decreased 1.4increased 0.1 percentage points to 76.7%76.8% for the first six months of 2022. The decline in2023. Our gross margin was impacted by the gross margin of our owned manufacturing entities, which as previously disclosed, is significantly lower than the gross margin of our core Nu Skin gross margin is predominantly attributable to an increase in sales promotions, specificallybusiness. With the year-over-year growth within our Manufacturing segment, their revenue represented a higher proportion of our ageLOC LumiSpa devices in preparationoverall consolidated revenue for the second quarter and first half of the launch of the ageLOC LumiSpa iO, which begins2023 than in the third quarter of 2022.prior-year periods.
Selling expenses
Selling expenses as a percentage of revenue decreased to 39.1%37.0% for the second quarter of 2022,2023, compared to 39.9%39.1% for the prior year period, and decreased to 39.6%38.0% for the first six months of 2022,2023, compared to 40.3%39.6% for the prior-year period. Core Nu Skin selling expenses as a percentage of revenue decreased 0.81.8 percentage points to 42.0%40.2% for the second quarter of 20222023 and decreased 0.81.5 percentage points to 42.5%41.0% for the first six monthshalf of 2022.2023. Selling expenses for our core Nu Skin business are driven by the specific performance of our individual Sales Leaders. Given the size of our sales force and the various components of our compensation and incentive programs, selling expenses as a percentage of revenue typically fluctuate plus or minus approximately 100 basis points from period to period. The declines in our selling expenses for the second quarter and first half of 2023 also reflect the sequential growth in Mainland China and the associated impact on selling expenses as discussed above in “Mainland China.”
General and administrative expenses
General and administrative expenses decreased to $141.6$137.0 million in the second quarter of 2022,2023, compared to $166.1$141.6 million in the prior-year period and decreased to $290.1$270.9 million in the first six monthshalf of 2022,2023, compared to $333.7$290.1 million in the prior-year period. The $24.5$4.6 million decrease for the second quarter of 2022 was primarily from a $15.8 million contraction in labor expenses from lower employee performance incentive compensation, along with our fourth quarter of 2021 exit of the Grow Tech segment, which led to $7.0 million less expense for the second quarter of 2022. The $43.62023 and $19.2 million decrease for the first six monthshalf of 2022,2023 was primarily from a $27.4 million contraction in labor expense and occupancy related expenses, from lower employee performance incentive compensation, along withboth attributable to our fourth quarter of 2021 exit of the Grow Tech segment,2022 restructuring in which led to $13.1 million less expense for the first half of 2022.we reduced our physical footprint and reduced our headcount. General and administrative expenses as a percentage of revenue increased to 25.3%27.4% for the second quarter of 2022,2023, from 23.6%25.3% for the prior-year period, and decreasedincreased to 24.9%27.6% for the first six monthshalf of 2022,2023, from 24.2%24.9% for the prior-year period.
21Restructuring and impairment expenses
TableIn the third quarter of Contents2022, we adopted a strategic plan to focus resources on our strategic priorities and optimize future growth and profitability. The global program includes workforce reductions and footprint optimization. We incurred total charges under the program of approximately $53.3 million, with $40.8 million in cash charges of severance and lease termination cost and approximately $12.5 million of non-cash charges of impairment of fixed assets, acceleration of depreciation and other intangibles related to the footprint optimization. During the third and fourth quarters of 2022, we incurred charges to be settled in cash of $20.1 million in severance charges, $7.4 million in lease termination cost, and $5.2 million in other associated cost, and non-cash charges of $8.2 million in fixed asset impairments, $0.9 million in accelerated depreciation and $1.7 million in impairment of other intangibles. During the first quarter of 2023 we incurred charges to be settled in cash of $4.0 million in severance charges, $1.9 million in lease termination cost, and $2.2 million in other associated cost, and non-cash charges of $1.7 million in accelerated depreciation. No restructuring charges were incurred in the second quarter of 2023.
Other income (expense), net
Other income (expense), net was $(8.6)$(5.4) million for the second quarter of 20222023 compared to $(4.0) million$(8.6) for the prior-year period and $(10.1)$(6.9) million for the first six months of 20222023 compared to $(2.4) million$(10.1) for the prior-year period. The decrease in other incomeexpense for the second quarter is predominatelyand first half of 2023 are primarily from a $5.7 million unrealized investment loss recorded in the second quarter of 2022, related to a controlled environment agriculture company we invested in as part of our previous Grow Tech segment. Following our fourth quarter of 2021 exit from the Grow Tech segment, we are in the process of exiting our investment. In addition, we recorded a $3.0 million increase in foreign currency losses during the second quarter of 2022 compared to the prior-year period,this was partially offset by a second quarter 2022 $1.6 million decline in the contingent consideration associated with our previous acquisition, due to current period changes in our assumptions and forecast.acquisition.
Provision for income taxes
Provision for income taxes for the three- and six-month periods ended June 30, 20222023 was $10.2 million and $13.4 million, respectively, compared to $8.7 million and $20.6 million, respectively, compared to $22.0 million and $39.1 million for the prior-year periods. The effective tax rates for the three- and six-month periods ended June 30, 2022 were 20.2%27.5% and 22.0%26.0% of pre-tax income compared, respectively, to 27.1%20.2% and 26.8%22.0% in the prior-year periods. The decreaseincrease in effective tax rate for the second quarter and first halfsix months of 20222023 primarily reflects the strong growthgeographic mix of our profitability and the associated variations in the U.S. market, which enabled us to utilize additional foreign tax credits to offset U.S. income taxes.rates.
Net income
As a result of the foregoing factors, net income for the second quarter of 20222023 was $34.2$26.9 million, compared to $59.3$34.2 million in the prior-year period. Net income for the first six months of 20222023 was $73.0$38.3 million, compared to $106.8$73.0 million for the first six months of 2021.2022.
Liquidity and Capital Resources
Historically, our principal uses of cash have included operating expenses (particularly selling expenses) and working capital (principally inventory purchases), as well as capital expenditures, stock repurchases, dividends, and debt 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 six months of 2022,2023, we generated $54.1$13.4 million in cash from operations, compared to $1.9$54.1 million during the prior-year period. The increasedecrease in cash flow from operations primarily reflects an approximate $32.2$18.5 million declineincrease in inventory during the period, compared to an inventory increase of $80.2 milliona decrease in the prior year period, partiallyas we begin to stage inventory for our upcoming product launches. Our cash from operations was also impacted by lower net income in 2023, offset by the lower revenue and a decreasehigher payout of accruals in accrued expenses from the first halfquarter of 2022, payout of our fourth quarter of 2021 restructuring cost.primarily from sales commissions. Cash and cash equivalents, including current investments, as of June 30, 20222023 and December 31, 20212022 were $381.8$252.3 million and $354.8$278.5 million, respectively, with the increasedecrease being driven by cash from operations, increased debt following our debt modification during the second quarter of 2022, and cash received from the exercise of employee stock options, partially offset byquarterly dividend payments, capital expenditures, as discussed below, our quarterly dividend payments, stock repurchases and payment on liabilities associated with our fourth quarter 2021 restructuring.2022 restructuring plan, partially offset by borrowings on our revolving credit facility.
Working capital. As of June 30, 2022,2023, working capital was $498.8$347.5 million, compared to $343.3$400.6 million as of December 31, 2021. The increase2022. Our decline in working capital is primarily attributable to our second quarter debt modification, which resulted in a net $52.5 millionacquisitions of incremental borrowings, while our short-term debt decreased $67.5 million. Our working capital also benefited from a $83.1 million reduction in accrued expenses, primarily from the first half of 2022 pay-out of restructuring costBeautyBio and employee incentive accruals, partially offset by a $45.7 million decrease in inventory.LifeDNA.
Capital expenditures. Capital expenditures for the six months ended June 30, 20222023 were $19.8$26.2 million. We expect that our capital expenditures in 20222023 will be primarily related to:
| ● | 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 China. |
We estimate that capital expenditures for the uses listed above will total approximately $70–90$55–75 million for 2022.2023. We are currently expecting to completeThe construction of the new manufacturing plant in Mainland China inwas materially completed during the back halfsecond quarter of 2022.2023. As of June 30, 2022,2023, we have spent approximately $40.5$55.3 million on this project, with $3.2including $4.6 million in the first half of 20222023 and expect that our expenditures for this project will total approximately $52-57$56-58 million, including approximately $15-20$5-7 million during 2022.2023.
Credit Agreement. On June 14, 2022, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with various financial institutions as lenders and Bank of America, N.A., as administrative agent. The Credit Agreement provides for a $400.0 million term loan facility and a $500.0 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. TheBoth facilities bear interest rate applicable toat the facilities is subject to adjustmentsSOFR, plus a margin based on our consolidated leverage ratio. The term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 2.5% during the first year and 5.0% during the subsequent years after the closing date of the Credit Agreement, with the remainder payable at final maturity. As of June 30, 2023 and December 31, 2022, we had $30.0$120.0 million and $10.0 million of outstanding borrowings under our revolving credit facility, and $400.0$390.0 million and $395.0 million on our term loan facility. In June 2023, we drew $80.0 million under our revolving credit facility primarily to fund our acquisition of BeautyBio. The carrying value of the debt also reflects debt issuance costs of $(2.8)$2.2 million and $2.5 million as of June 30, 2023 and December 31, 2022, 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. As of June 30, 2022,2023, we were in compliance with all debt covenants under the Credit Agreement.
Modification of previous credit agreement. On June 14, 2022, we repaid our outstanding debt under our credit agreement, dated as of April 18, 2018, with several financial institutions as lenders and Bank of America, N.A., as administrative agent. We had indebtedness of $70.0 million on our revolver as of December 31, 2021, and $307.5 million on our term loan as of December 31, 2021.
Derivative Instruments. As of June 30, 2022,2023, 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 second quarter and first half of 2022,2023, we repurchased approximately 0.2 millionzero shares of our Class A common stock under the plan for $10.0 million.plan. As of June 30, 2022, $225.42023, $175.4 million was available for repurchases under the plan. Our stock repurchases are used primarily to offset dilution from our equity incentive plans and for strategic initiatives.
Dividends. In February and May 2022,2023, our board of directors declared quarterly cash dividends of $0.385$0.39 per share. These quarterly cash dividends of $19.3$19.4 million and $19.4$19.5 million were paid on March 9, 20228, 2023 and June 8, 20227, 2023 to stockholders of record on February 28, 202227, 2023 and May 27, 2022.26, 2023. In August 2022,July 2023, our board of directors declared a quarterly cash dividend of $0.385$0.39 per share to be paid on September 7, 20226, 2023 to stockholders of record on August 26, 2022.25, 2023. Currently, we anticipate that our board of directors will continue to declare quarterly cash dividends and that the cash flows from operations will be sufficient to fund our future dividend payments. However, the continued declaration of dividends is subject to the discretion of our board of directors and will depend upon various factors, including our net earnings, financial condition, cash requirements, future prospects and other relevant factors.
Cash from foreign subsidiaries. As of June 30, 20222023 and December 31, 2021,2022, we held $381.8$252.3 million and $354.8$278.5 million, respectively, in cash and cash equivalents, including current investments. These amounts include $257.2$207.3 million and $274.9$223.0 million as of June 30, 20222023 and December 31, 2021,2022, 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 June 30, 2022,2023, we had $56.6$52.4 million in cash denominated in Chinese RMB. We also have experienced delays in repatriating cash from Argentina. As of June 30, 20222023 and December 31, 2021,2022, we had $12.6$16.2 million and $11.3$14.9 million, respectively, in intercompany receivables with our Argentina subsidiary. We also have intercompany loan arrangements in 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 second quarter of 2022.2023.
Seasonality and Cyclicality
In addition to general economic factors, we are impacted by seasonal factors and trends such as major cultural events and vacation patterns. For example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a negative impact on that quarter. We believe that direct selling is also generally negatively impacted during the third quarter, when many individuals, including our sales force, traditionally take vacations.
Prior to making a key product generally available for purchase in a market, we mayoften do one or more introductory offerings of the product, such as a preview of the product to our Sales Leaders a limited-time offer, or other product introduction or promotion. These offerings maysometimes generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue, Sales Leaders, Paid Affiliates and/or Customers during the quarter and can skew year-over-year and sequential comparisons.
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 June 30, 2022,2023, 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 six-month periods ended June 30, 20222023 and 2021.2022.
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 June 30, 20222023 and 2021,2022, 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 June 30, 2022,2023, and 20212022 we did not hold any material 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 June 30, 2022.2023.
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 June 30, 20222023 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 20212022 fiscal year.
The information presented below supplements and should be read 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 20212022 fiscal year and subsequent reports.
Cyber security risks and the failure to maintain the integrity of company, employee, sales force or consumer data could expose us to data loss, litigation, liability and harm to our reputation.
If we are unable to retain our existingWe collect, transmit and/or store large volumes of company, employee, sales force and recruit additional peopleconsumer data, including payment card information, personally identifiable information and other personal information, for business purposes, including for transactional and promotional purposes, and our various information technology systems enter, process, summarize and report such data. The connected devices that we have developed or are developing also collect consumer data. The integrity and protection of this data is critical to joinour business.
We are subject to significant security and privacy regulations, as well as requirements imposed by the payment card industry. For example, during 2018, the General Data Protection Regulation went into effect in the European Union, imposing increased data protection regulations, the violation of which could result in fines of up to 4% of our annual consolidated revenue. Numerous states have recently enacted new data protection laws and regulations. Many other jurisdictions, including California and Mainland China, have increased enforcement of laws and regulations that have recently taken effect. We believe these trends will continue. In the United States, congressional committees have held preliminary hearings about the advisability of a federal data privacy law, but it is uncertain whether the federal government will adopt such a law and whether it would preempt state data privacy laws. The prospect of new data privacy laws and ambiguity regarding the interpretation of existing laws has resulted in significant uncertainty and compliance costs. In addition to laws specifically governing privacy and data security, in some cases, federal and state regulators and state attorneys general and administrative agencies have interpreted more general consumer protection laws to impose standards for the online collection, use, dissemination and security of data. Although we monitor regulatory developments in this area, any actual or perceived failure by us to comply with these requirements could subject us to significant penalties, lawsuits and negative publicity and require changes to our business practices. In particular, maintaining compliance with these and other evolving regulations and requirements around the world often requires changes to our information system architecture and data storage processes. For example, data privacy laws in Mainland China and other jurisdictions place restrictions on the cross-border transmission of data, which could impede our ability to perform many business functions, including calculating and paying compensation to our sales force, absent significant changes to our revenue may not increaseinformation system architecture. Changing our information system architecture and may even decline.data storage processes is difficult and expensive. Investigations by the regulators of data security laws could also result in the payment of fines, reputational harm and an inability to continue doing business in certain jurisdictions. Private actions by affected individuals could also result in significant monetary or reputational damage.
We also share certain data with our sales force. We could face fines, investigations, lawsuits or other legal action if our sales force violates, or is perceived to violate, applicable laws and regulations, and our reputation and brand could be negatively impacted.
Similarly, a failure to adhere to the payment card industry’s data security standards could cause us to incur penalties from payment card associations, termination of our ability to accept credit or debit card payments, litigation and adverse publicity, any of which could have a material adverse effect on our business and financial condition.
In addition, a penetrated or compromised data system or the intentional, inadvertent or negligent release, misuse or disclosure of data could result in theft, loss, or fraudulent or unlawful use of company, employee, sales force or consumer data. Although we take measures to protect the security, integrity and confidentiality of our data systems, we experience cyber attacks of varying degrees and types on a regular basis. Our productsinfrastructure may be vulnerable to these attacks, and in some cases it could take time to discover them. Our security measures may also be breached due to employee error or malfeasance, system errors or otherwise. This risk is heightened as a result of changes due to the COVID-19 pandemic as many of our employees are primarily marketedworking remotely. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information to gain access to our data or our users’ or customers’ data. Any such breach or unauthorized access could result in the unauthorized disclosure, misuse or loss of sensitive information and lead to significant legal and financial exposure, regulatory inquiries or investigations, loss of confidence by our sales force and we depend on them to generate virtually allcustomers, disruption of our revenue. Our sales force may terminate their services at any time,operations, damage to our reputation, and like most direct selling companies,costs associated with remediating the incident. These risks are heightened as we experience high turnover among our sales force from year to year. People who join our company to purchase our products for personal consumption or for short-term income goals frequently only staywork with us for a short time. Sales Leaders who have committed timethird-party providers, including providers of mobile and effort to build a sales organization will generally stay for longer periods. To increase our revenue, we must increase the number of and/or the productivity of our sales force. We must also expand our outreachcloud technologies, and outbound efforts to attract, connect and nurture new customers for a wider consumer base who purchase product and whom we can foster along a consumer journey to promote retention and higher lifetime value.
We have experienced periodic fluctuations in both Sales Leaders and Customers in the past and could experience such fluctuations again in the future. For example, our Sales Leaders in Mainland China declined 46% from December 31, 2018 to December 31, 2019 due to such factors as meeting restrictions and negative media scrutiny. Our ability to retain our Sales Leaders and Customers could be affected as our sales force makes increased use ofuses social sharing channels, which may allow them to more easily engage their consumersmedia, as the providers and sales network in other opportunities. If our initiatives do not drive growth in both Sales Leaders and Customers, our operating resultssocial media platforms could be harmed. Whilevulnerable to the same types of breaches and other risks. Acquisition activity, which we have engaged in and which we may continue to engage in, may also heighten these risks, as the systems of the companies we acquire are not under our control prior to the acquisitions and it may take many stepstime to help train, motivateevaluate these systems and retain our sales force, we cannot accurately predict how the number and productivity of our sales force may fluctuate because we rely primarily upon our Sales Leadersimplement appropriate modifications to find new consumers and to find, train and develop new Sales Leaders. Our operating results could be harmed if we and our Sales Leaders do not generate sufficient interest in our business and its products to retain and motivate our existing sales force and attract new people to join our sales force.them.
The number and productivity of our sales force is negatively impacted by several additional factors, including:
| ● | any adverse publicity or negative public perception regarding us, our products or ingredients, our distribution channel, or our industry or competitors; |
| ● | lack of interest in, dissatisfaction with, or the technical failure of, existing or new products; |
| ● | lack of compelling products or income opportunities, including through our sales compensation plans and incentive trips and other offerings; |
| ● | negative sales force reaction to changes in our sales compensation plans or to our failure to make changes that would be necessary to keep our compensation competitive with the market; |
| ● | interactions with our company, including our actions to enforce our policies and procedures and the quality of our customer service; |
| ● | any regulatory actions or charges against us or others in our industry, as well as regulatory changes that impact product formulations and sales viability; |
| ● | general economic, business, public health and geopolitical conditions, including employment levels, employment trends such as the gig and sharing economies, pandemics or other conditions that curtail person-to-person interactions, and the ongoing conflict in Russia and Ukraine which has caused distraction to our sales force; |
| ● | changes in the policies of social media platforms used to prospect or recruit potential consumers and sales force participants; |
| ● | our and our sales force’s ability to provide a positive customer experience and to facilitate customer loyalty; |
| ● | recruiting efforts of our competitors and changes in consumer-loyalty trends; and |
| ● | potential saturation or maturity levels in a given market, which could negatively impact our ability to attract and retain our sales force in such market. |
Our ability to conduct business in international markets may be affected by political, legal, tax and regulatory risks.
Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is exposed to risks associated with our international operations, including:
| ● | the possibility that a government might ban or severely restrict our sales compensation and business models; |
| ● | the possibility that local civil unrest, political instability, or changes in diplomatic or trade relationships might disrupt our operations in one or more markets—for example, the ongoing conflict in Russia and Ukraine has caused distraction to our sales force; |
| ● | the lack of well-established or reliable legal systems in certain areas where we operate; |
| ● | the presence of high inflation in the economies of international markets in which we operate; |
| ● | the possibility that a government authority might impose legal, tax, customs, or other financial burdens on us or our sales force, due, for example, to the structure of our operations in various markets; |
| ● | the possibility that a government authority might challenge the status of our sales force as independent contractors or impose employment or social taxes on our sales force; and |
| ● | the possibility that governments may impose currency remittance restrictions limiting our ability to repatriate cash. |
There has been an increasing level of tension in U.S.-China relations over the last few years. Given the significant size of our China business, our business could be harmed if relations continue to deteriorate or additional sanctions or restrictions are imposed by either government. In addition, there have been adverse public reaction and media attention to statements made by representatives of other businesses related to these issues that have adversely affected business. We could similarly face adverse public or media attention, and potentially increased regulatory scrutiny, as a result of increased trade or political tensions or any statements or actions by employees or our sales force that generate publicity with respect to these issues.
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) | |
| | | | | | | | | | | | |
April 1 - 30, 2022 | | | — | | | $ | — | | | | — | | | $ | 235.4 | |
May 1 - 31, 2022 | | | 109,818 | | | | 44.64 | | | | 109,818 | | | $ | 230.5 | |
June 1 - 30, 2022 | | | 112,017 | | | | 45.55 | | | | 112,017 | | | $ | 225.4 | |
Total | | | 221,835 | | | $ | 45.10 | | | | 221,835 | | | | | |
| | (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) | |
April 1 - 30, 2023 | | | — | | | $ | — | | | | — | | | $ | 175.4 | |
May 1 - 31, 2023 | | | — | | | | — | | | | — | | | $ | 175.4 | |
June 1 - 30, 2023 | | | — | | | | — | | | | — | | | $ | 175.4 | |
Total | | | — | | | $ | — | | | | — | | | | | |
(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.
Draw On Revolving Credit Facility
On August 1, 2022,June 13, 2023, we adopted a strategic plandrew $80.0 million under our revolving credit facility, bringing the total balance under our revolving credit facility to focus resources on$120.0 million as of the Company’s strategic priorities and optimize future growth and profitability. This global program includes workforce reductions and footprint optimization. We estimate total charges underdate hereof. The material terms of the program will be approximately $35–$45 million, consisting of $20–$25 millionCredit Agreement are described in cash severance payments, approximately $10 million in cash costs associated with lease terminations and $5–$10 million of non-cash charges of impairment of fixed assets relatedNote 4 to the footprint optimization. We expect thatconsolidated financial statements contained in this Quarterly Report and in the actions contemplated underCurrent Report on Form 8-K filed with the program will be substantially completedU.S. Securities and Exchange Commission on June 17, 2022. Such descriptions are incorporated by December 31, 2022.
reference herein.
On May 5, 2023, Emma Battle, a member of our Board of Directors, adopted a trading plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) to sell 1,272 shares of our Class A Common Stock 27between August 2023 and July 2024. It is anticipated that all of the shares will be sold in August 2023.
Exhibits Regulation S-K Number | | Description |
| | |
| | Nu Skin Enterprises, Inc. Amended and Restated Credit Agreement among the Company, various financial institutions,2009 Key Employee Death Benefit Plan. |
| | Amendment 1 to Fourth Amended and Bank of America, N.A. as administrative agent, dated as of June 14, 2022 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed June 17, 2022).Restated Nu Skin Enterprises, Inc. Deferred Compensation Plan. |
| | 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,James D. Thomas, 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,James D. Thomas, 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.
August 1, 2023
August 4, 2022
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NU SKIN ENTERPRISES, INC. | |
| | |
By: | /s/ Mark H. LawrenceJames D. Thomas | |
| Mark H. LawrenceJames D. Thomas
| |
| Chief Financial Officer | |
| (Duly Authorized Officer and Principal Financial Officer) | |
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