10-Q 1 ef20026282_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, 2024

OR


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 May 1, 2024, 49,667,403 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 2024

TABLE OF CONTENTS

   
Page
Part I.
Financial Information
 
 
Item 1.
Financial Statements (Unaudited):
 
   
1
   
2
   
3
   
4
    5
    6
 
Item 2.
18
 
Item 3.
27
 
Item 4.
27
       
       
Part II.
Other Information
 
 
Item 1.
28
 
Item 1A.
28
 
Item 2.
28
 
Item 3.
28
 
Item 4.
28
 
Item 5.
28
 
Item 6.
29
       
  30

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.

PART I.  FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

NU SKIN ENTERPRISES, INC.
Consolidated Balance Sheets (Unaudited)
(U.S. dollars in thousands)

 
March 31,
2024
   
December 31,
2023
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
212,532
   
$
256,057
 
Current investments
   
8,674
     
11,759
 
Accounts receivable, net
   
67,041
     
72,879
 
Inventories, net
   
265,100
     
279,978
 
Prepaid expenses and other
   
93,913
     
81,198
 
Total current assets
   
647,260
     
701,871
 
                 
Property and equipment, net
   
422,818
     
432,965
 
Operating lease right-of-use assets
   
93,092
     
90,107
 
Goodwill
   
230,768
     
230,768
 
Other intangible assets, net
   
101,933
     
105,309
 
Other assets
   
246,044
     
245,443
 
Total assets
 
$
1,741,915
   
$
1,806,463
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
32,237
   
$
43,505
 
Accrued expenses
   
247,068
     
260,366
 
Current portion of long-term debt
   
30,000
     
25,000
 
Total current liabilities
   
309,305
     
328,871
 
                 
Operating lease liabilities
   
74,198
     
70,943
 
Long-term debt
   
453,183
     
478,040
 
Other liabilities
   
95,023
     
106,641
 
Total liabilities
   
931,709
     
984,495
 
                 
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
   
618,706
     
621,853
 
Treasury stock, at cost – 40.9 million and 41.1 million shares
   
(1,564,942
)
   
(1,570,440
)
Accumulated other comprehensive loss
   
(110,607
)
   
(100,006
)
Retained earnings
   
1,866,958
     
1,870,470
 
Total stockholders’ equity
   
810,206
     
821,968
 
Total liabilities and stockholders’ equity
 
$
1,741,915
   
$
1,806,463
 

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

NU SKIN ENTERPRISES, INC.
Consolidated Statements of Income (Unaudited)
(U.S. dollars in thousands, except per share amounts)

 
Three Months Ended
March 31,
 
   
2024
   
2023
 
Revenue
 
$
417,306
   
$
481,462
 
Cost of sales
   
123,242
     
133,588
 
Gross profit
   
294,064
     
347,874
 
                 
Operating expenses:
               
Selling expenses
   
153,542
     
188,124
 
General and administrative expenses
   
124,566
     
133,899
 
Restructuring and impairment expenses
    7,134       9,787  
Total operating expenses
   
285,242
     
331,810
 
                 
Operating income
   
8,822
     
16,064
 
Interest expense
    7,325       4,888  
Other income (expense), net
   
(396
)
   
3,412
 
                 
Income before provision for income taxes
   
1,101
     
14,588
 
Provision for income taxes
   
1,634
     
3,212
 

               
Net (loss) income
 
$
(533
)
 
$
11,376
 

               
Net (loss) income per share (Note 6):
               
Basic
 
$
(0.01
)
 
$
0.23
 
Diluted
 
$
(0.01
)
 
$
0.23
 
                 
Weighted-average common shares outstanding (000s):
               
Basic
   
49,538
     
49,644
 
Diluted
   
49,538
     
50,058
 

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

NU SKIN ENTERPRISES, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(U.S. dollars in thousands)

 
Three Months Ended
March 31,
 
   
2024
   
2023
 
Net (loss) income
 
$
(533
)
 
$
11,376
 
                 
Other comprehensive (loss) income, net of tax:
               
Foreign currency translation adjustment, net of taxes of $ and $(68) for the three months ended March 31, 2024 and 2023, respectively
   
(10,104
)
   
(2,139
)
Net unrealized gains/(losses) on cash flow hedges, net of taxes of $(435) and $175 for the three months ended March 31, 2024 and 2023, respectively
   
1,574
     
(635
)
Reclassification adjustment for realized losses/(gains) in current earnings, net of taxes of $572 and $475 for the three months ended March 31, 2024 and 2023, respectively
   
(2,071
)
   
(1,722
)
     
(10,601
)
   
(4,496
)
Comprehensive (loss) income
 
$
(11,134
)
 
$
6,880
 

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

NU SKIN ENTERPRISES, INC.
Consolidated Statements of Stockholders’ Equity (Unaudited)
(U.S. dollars in thousands)

 
For the Three Months Ended March 31, 2024
 
   
Class A
Common
Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Retained
Earnings
   
Total
 
Balance at January 1, 2024
 
$
91
   
$
621,853
   
$
(1,570,440
)
 
$
(100,006
)
 
$
1,870,470
   
$
821,968
 
                                                 
Net loss
   
     
     
     
     
(533
)
   
(533
)
Other comprehensive loss, net of tax
   
     
     
     
(10,601
)
   
     
(10,601
)
Exercise of employee stock options (0.2 million shares)/vesting of stock awards
   
     
(7,389
)
   
5,498
     
     
     
(1,891
)
Stock-based compensation
   
     
4,242
     
     
     
     
4,242
 
Cash dividends
   
     
     
     
     
(2,979
)
   
(2,979
)
Balance at March 31, 2024
 
$
91
   
$
618,706
   
$
(1,564,942
)
 
$
(110,607
)
 
$
1,866,958
   
$
810,206
 

 
For the Three Months Ended March 31, 2023
 
   
Class A
Common
Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Retained
Earnings
   
Total
 
Balance at January 1, 2023
 
$
91
   
$
613,278
   
$
(1,569,061
)
 
$
(86,509
)
 
$
1,939,497
   
$
897,296
 
                                                 
Net income
   
     
     
     
     
11,376
     
11,376
 
Other comprehensive loss, net of tax
   
     
     
     
(4,496
)
   
     
(4,496
)
Exercise of employee stock options (0.4 million shares)/vesting of stock awards
   
     
(5,797
)
   
9,981
     
     
     
4,184
 
Stock-based compensation
   
     
4,002
     
     
     
     
4,002
 
Cash dividends
   
     
     
     
     
(19,392
)
   
(19,392
)
Balance at March 31, 2023
 
$
91
   
$
611,483
   
$
(1,559,080
)
 
$
(91,005
)
 
$
1,931,481
   
$
892,970
 

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

NU SKIN ENTERPRISES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(U.S. dollars in thousands)

 
Three Months Ended
March 31,
 
   
2024
   
2023
 
Cash flows from operating activities:
           
Net (loss) income
 
$
(533
)
 
$
11,376
 
Adjustments to reconcile net (loss) income to cash flows from operating activities:
               
Depreciation and amortization
   
18,437
     
16,983
 
Non-cash lease expense
   
7,987
     
8,566
 
Stock-based compensation
   
4,242
     
4,002
 
Inventory write-down
    2,003       3,267  
Foreign currency losses / (gains)
   
1,639
     
(2,102
)
Loss / (gain) on disposal of assets
   
218
     
(17
)
Deferred taxes
   
1,348
     
(72
)
Changes in operating assets and liabilities:
               
Accounts receivable, net
   
7,447
     
(15,336
)
Inventories, net
   
6,999
     
(23,001
)
Prepaid expenses and other
   
(13,352
)
   
(12,895
)
Other assets
   
(4,295
)
   
(864
)
Accounts payable
   
(10,575
)
   
(4,495
)
Accrued expenses
   
(4,227
)
   
(4,129
)
Other liabilities
   
(14,020
)
   
(3,360
)
Net cash provided by / (used in) operating activities
   
3,318
     
(22,077
)
                 
Cash flows from investing activities:
               
Purchases of property and equipment
   
(12,281
)
   
(11,487
)
Proceeds on investment sales
   
3,019
     
4,986
 
Purchases of investments
   
     
(8,195
)
Net cash used in investing activities
   
(9,262
)
   
(14,696
)
                 
Cash flows from financing activities:
               
Exercise of employee stock options and taxes paid related to the net shares settlement of stock awards
   
(1,891
)
   
4,184
 
Payment of cash dividends
   
(2,979
)
   
(19,392
)
Finance lease principal payments
   
(785
)
   
(912
)
Contingent consideration payments
    (6,300 )      
Payments of debt
   
(20,000
)
   
(2,500
)
Proceeds from debt
   
     
20,000
 
Net cash (used in) / provided by financing activities
   
(31,955
)
   
1,380
 
                 
Effect of exchange rate changes on cash
   
(5,626
)
   
609
 
                 
Net decrease in cash and cash equivalents
   
(43,525
)
   
(34,784
)
                 
Cash and cash equivalents, beginning of period
   
256,057
     
264,725
 
                 
Cash and cash equivalents, end of period
 
$
212,532
   
$
229,941
 

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

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—Americas, which includes Canada, Latin America and the United States; Mainland China; Southeast Asia/Pacific, which includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Australia, New Zealand, and other markets; Japan; Europe and Africa, which includes markets in Europe as well as South Africa; South Korea; and Hong Kong/Taiwan, which also includes Macau—and two Rhyz segments—Manufacturing, which includes manufacturing and packaging subsidiaries it has acquired; and Rhyz other, which includes other investments by its Rhyz business 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 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, 2024, and for the three-month periods ended March 31, 2024 and 2023. 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, 2023 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, 2023.


Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280). The amendments in this ASU require disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker (CODM), as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. This ASU requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss. Public entities will be required to provide all annual disclosures currently required by Topic 280 in interim periods, and entities with a single reportable segment are required to provide all the disclosures required by the amendments in the update and existing segment disclosures in Topic 280. This amendment is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption. Early adoption is permitted. The Company will adopt this standard with its fiscal 2024 annual filing. The Company is currently evaluating these new disclosure requirements and the impact of adoption.


Reclassifications

Certain prior period amounts have been reclassified to conform with current presentation. The Company reclassified $4.9 million of interest expense from other income (expense), net to the interest expense line on the consolidated statement of income for the first quarter of 2023. The reclassification had no impact on net income for the first quarter of 2023.

Inventory

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

 
March 31,
2024
   
December 31,
2023
 
Raw materials
 
$
133,600
   
$
140,133
 
Finished goods
   
131,500
     
139,845
 
Total Inventory, net
 
$
265,100
   
$
279,978
 

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

   
Three Months Ended
March 31,
 
   
2024
   
2023
 
Beginning balance
 
$
83,378
   
$
37,267
 
Additions
   
2,003
     
3,267
 
Write-offs
   
(4,862
)
   
(4,518
)
Ending Balance
 
$
80,519
   
$
36,016
 

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, 2024 and December 31, 2023 was $11.9 million and $12.6 million, respectively. The contract liabilities impact to revenue for the three-month periods ended March 31, 2024, and 2023 was an increase of $0.7 million and an increase of $1.3 million, respectively.

3.
Goodwill

The Company’s reporting units for goodwill are its operating segments, which are also its reportable segments, with the exception of Rhyz other. The Company’s Rhyz other segment consists of three reporting units, which as of both March 31, 2024 and December 31, 2023 had goodwill of $12.6 million, $19.6 million and $4.7 million.

During the three months ended March 31, 2024, the Company determined that the recent decline in the Company’s stock price and corresponding market capitalization was a triggering event that required the Company to perform a quantitative impairment analysis for all reporting units. Based on the analysis, the Company concluded the fair value of all reporting units were in excess of their carrying amounts and no impairment charge was required.  For goodwill, the estimated fair value of all reporting units exceeded the carrying value by approximately 1% - 7%; therefore the reporting units are considered to be at risk of future impairment. The reporting units’ fair values remain sensitive to unfavorable changes in assumptions utilized including revenue growth rates, profitability margins, estimated future cash flows, and the discount rates that could result in impairment charges in a future period.

The following table presents goodwill allocated to the Company’s reportable segments for the periods ended March 31, 2024 and December 31, 2023 (U.S. dollars in thousands):

 
March 31,
2024
   
December 31,
2023
 
Nu Skin
           
Americas
 
$
9,449
   
$
9,449
 
Mainland China
   
32,179
     
32,179
 
Southeast Asia/Pacific
   
18,537
     
18,537
 
Japan
   
16,019
     
16,019
 
Europe & Africa
   
2,875
     
2,875
 
South Korea
    29,261       29,261  
Hong Kong/Taiwan
   
6,634
     
6,634
 
Rhyz Investments
               
Manufacturing
   
78,875
     
78,875
 
Rhyz other
   
36,939
     
36,939
 
Total
 
$
230,768
   
$
230,768
 

4.
Debt

Credit Agreement

On June 14, 2022, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with several financial institutions as lenders and Bank of America, N.A., as administrative agent, which amended and restated the 2018 Credit Agreement. The Credit Agreement provides for a $400 million term loan facility and a $500 million revolving credit facility, each with a term of five years. Both facilities bear interest at the SOFR, plus a margin based on the Company’s consolidated leverage ratio. Commitment fees payable under the Credit Agreement are also based on the consolidated leverage ratio as defined in the Credit Agreement and range from 0.175% to 0.30% on the unused portion of the total lender commitments then in effect. The term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 2.5% during the first year and 5.0% during the second, third, fourth and fifth years after the closing date of the Credit Agreement, with the remainder payable at final maturity. The Credit Agreement is guaranteed by certain of the Company’s domestic subsidiaries and collateralized by assets of such subsidiaries, including a pledge of 65% of the capital stock of certain foreign subsidiaries. The Credit Agreement requires the Company to maintain a consolidated leverage ratio not exceeding 2.75 to 1.00 and a consolidated interest coverage ratio of no less than 3.00 to 1.00. As of March 31, 2024, 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, 2024 and December 31, 2023:

Facility or
Arrangement
 
Original
Principal
Amount
 
Balance as of
March 31,
2024(1)(2)
 
Balance as of
December 31,
2023(1)(2)
 
Interest
Rate
 
Repayment
Terms
Credit Agreement term loan facility
 
$400.0 million
 
$375.0 million

 
$385.0 million
 
Variable 30 day: 7.43%
 
21% of the principal amount is payable in increasing quarterly installments over a five-year period that began on September 30, 2022, with the remainder payable at the end of the five-year term.
Credit Agreement revolving credit facility
     
$110.0 million
 
$120.0 million
 
Variable 30 day: 7.43%
 
Revolving line of credit expires June 14, 2027.

(1)
As of March 31, 2024 and December 31, 2023, the current portion of the Company’s debt (i.e., becoming due in the next 12 months) included $20.0 million and $25.0 million, respectively, of the balance of its term loan under the Credit Agreement and $10.0 million and zero, respectively, of the balance under the revolving line of credit.

(2)
The carrying value of the debt reflects the amounts stated in the above table, less debt issuance costs of $1.8 million and $2.0 million as of March 31, 2024 and December 31, 2023, respectively, related to the Credit Agreement, which are not reflected in this table.

5.
Leases

As of March 31, 2024, the weighted average remaining lease term was 8.2 and 3.5 years for operating and finance leases, respectively. As of March 31, 2024, the weighted average discount rate was 3.8% and 3.7% for operating and finance leases, respectively.

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

 
Three Months Ended
March 31,
 
   
2024
   
2023
 
Operating lease expense
           
Operating lease cost
 
$
6,066
   
$
8,161
 
Variable lease cost
   
1,776
     
1,075
 
Finance lease expense
               
Amortization of right-of-use assets
   
758
     
1,000
 
Interest on lease liabilities
   
109
     
134
 
Total lease expense
 
$
8,709
   
$
10,370
 

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

 
Three Months Ended
March 31,
 
   
2024
   
2023
 
Operating cash outflow from operating leases
 
$
6,371
   
$
8,150
 
Operating cash outflow from finance leases
 
$
111
   
$
132
 
Financing cash outflow from finance leases
 
$
785
   
$
912
 
Right-of-use assets obtained in exchange for operating lease obligations
 
$
13,034
   
$
7,981
 
Right-of-use assets obtained in exchange for finance lease obligations
 
$
5
   
$
520
 

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

Year Ending December 31
 
Operating
Leases
   
Finance
Leases
 
2024
 
$
18,576
   
$
2,541
 
2025
   
19,920
     
3,305
 
2026
   
15,170
     
3,213
 
2027
   
11,496
     
2,882
 
2028
   
8,531
     
47
 
Thereafter
   
36,730
     
 
Total
   
110,423
     
11,988
 
Less: Finance charges
   
15,306
     
795
 
Total principal liability
 
$
95,117
   
$
11,193
 

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, 2024 and 2023, the only dilutive common shares outstanding relate to the Company’s outstanding stock awards and options. For the three-month periods ended March 31, 2024 and 2023, stock awards and options of 1.8 million and 0.1 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

Dividends

In February 2024, the Company’s board of directors declared a quarterly cash dividend of $0.06 per share. This quarterly cash dividend of $3.0 million was paid on March 6, 2024 to stockholders of record on February 26, 2024. In May 2024, the board of directors declared a quarterly cash dividend of $0.06 per share to be paid on June 12, 2024 to stockholders of record on May 31, 2024.

Repurchase of common stock

During the three-month periods ended March 31, 2024 and 2023, the Company repurchased zero shares of its Class A common stock under its stock repurchase plans.  As of March 31, 2024, $162.4 million was available for repurchases under the Company’s stock repurchase plan.

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, 2024
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets (liabilities):
                       
Cash equivalents and current investments
 
$
34,571
   
$
   
$
   
$
34,571
 
Derivative financial instruments asset
   
     
12,054
     
     
12,054
 
Life insurance contracts
   
     
     
48,414
     
48,414
 
Contingent consideration
   
     
     
   
Total
 
$
34,571
   
$
12,054
   
$
48,414
   
$
95,039
 

 
Fair Value at December 31, 2023
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets (liabilities):
                       
Cash equivalents and current investments
 
$
42,916
   
$
   
$
   
$
42,916
 
Derivative financial instruments asset
   
     
12,689
     
     
12,689
 
Life insurance contracts
   
     
     
45,041
     
45,041
 
Contingent consideration
   
     
     
(6,300
)
   
(6,300
)
Total
 
$
42,916
   
$
12,689
   
$
38,741
   
$
94,346
 

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):

   
2024
   
2023
 
Beginning balance at January 1
 
$
45,041
   
$
40,055
 
Actual return on plan assets
   
3,373
     
1,998
Ending balance at March 31
 
$
48,414
   
$
42,053
 

Life insurance contracts: Accounting Standards Codification (“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):

   
2024
   
2023
 
Beginning balance at January 1
 
$
(6,300
)
 
$
(6,364
)
Changes in fair value of contingent consideration
   
   
93
 
Payments
    6,300        
Ending balance at March 31
 
$
 
$
(6,271
)

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, 2024 and December 31, 2023. 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 of 2021 gain was recorded within Other income (expense), net on the Consolidated Statement of Income. The upward fair value adjustment represents a nonrecurring fair value measurement based on observable price changes and is classified as a Level 3 fair value measurement.

8.
Income Taxes

Provision for income taxes for the first quarter of 2024 was $1.6 million, compared to $3.2 million for the prior-year period. The effective tax rate for the first quarter 2024 was 148.4% of pre-tax income compared to 22.0% 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 $105.6 million and $105.0 million as of March 31, 2024 and December 31, 2023, respectively.

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, 2023. If the amount designated as indefinitely reinvested as of December 31, 2023 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, 2023, tax years through 2020 and 2022 have been audited and are effectively closed to further examination. For tax year 2021, the Company was 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. For tax years 2023 and 2024, the Company has been accepted in the IRS’s Bridge Plus program. 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 2020. Foreign jurisdictions have varying lengths of statutes of limitations for income tax examinations. Some statutes are as short as three years and in certain markets 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 $2.0 to $3.0 million.

In 2021, as part of the Organization for Economic Co-operation and Development’s (“OECD”) Inclusive Framework, 140 member countries agreed to the implementation of the Pillar Two Global Minimum Tax (“Pillar Two”) of 15%. The OECD continues to release additional guidance, including administrative guidance on how Pillar Two rules should be interpreted and applied by jurisdictions as they adopt Pillar Two. A number of countries have utilized the administrative guidance as a starting point for legislation that went into effect January 1, 2024. Based on current enacted legislation, the Company anticipates the impact of Pillar Two to be immaterial for 2024.

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 2024, 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 $9.5 million will be reclassified as a reduction to interest expense.

As of March 31, 2024 and December 31, 2023, 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.

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,
2024
   
December 31,
2023
 
Interest Rate Swap - Asset
 
Prepaid expenses and other
 
$
9,451
   
$
8,955
 
Interest Rate Swap - Asset
 
Other assets
 
$
2,603
   
$
3,734
 


Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Loss

The tables below present the effect of cash flow hedge accounting on Accumulated Other Comprehensive Loss.

   
Amount of Gain (Loss)
Recognized in OCI on Derivatives
 
     
Three Months Ended
 
Derivatives in Cash flow
   
March 31,
 
Hedging Relationships:
   
2024
   
2023
 
Interest Rate Swaps
   
$
2,009
   
$
(810
)

     
Amount of Gain
Reclassified from Accumulated
Other Comprehensive Loss into Income
 
        
Three Months Ended
 
Derivatives in Cash flow
 
Income Statement
 
March 31,
 
Hedging Relationships:
 
Location
 
2024
   
2023
 
Interest Rate Swaps
 
Other income (expense), net
 
$
2,643
   
$
2,197

10.
Segment Information

The Company reports revenue from nine segments, consisting of its seven geographic Nu Skin segments—Americas, Mainland China,  Southeast Asia/Pacific, South Korea, Japan, Europe & Africa, 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 business 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.


Effective June 2023, the Company closed its Israel market. As a result the EMEA segment has been renamed Europe & Africa.

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.

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)
 
2024
   
2023
 
Nu Skin
           
Americas
 
$
75,031
   
$
101,157
 
Mainland China
    61,067       67,976  
Southeast Asia/Pacific
    60,065       67,810  
Japan
    44,236       52,606  
Europe & Africa
    42,273
      47,444
 
South Korea
   
40,963
      70,324
 
Hong Kong/Taiwan
   
30,466
     
34,548
 
Other
   
672
     
(115
)
Total Nu Skin
   
354,773
     
441,750
 
Rhyz Investments
               
Manufacturing (1)
   
50,302
     
35,767
 
Rhyz other
   
12,231
     
3,945
 
Total Rhyz Investments
    62,533
      39,712
 
Total
 
$
417,306
   
$
481,462
 

(1)
The Rhyz Investments Manufacturing segment had $8.6 million and $11.8 million of intersegment revenue for the three-month period ended March 31, 2024 and 2023, 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)
 
2024
   
2023
 
Nu Skin
           
Americas
 
$
14,976
   
$
16,250
 
Mainland China
    12,253
      13,612
 
Southeast Asia/Pacific
    11,084       12,471  
Japan
    12,006       12,908  
Europe & Africa
   
3,276
     
3,638
 
South Korea
    12,183       23,575  
Hong Kong/Taiwan
   
7,367
     
7,834
 
Nu Skin contribution
   
73,145
     
90,288
 
Rhyz Investments
               
Manufacturing
   
1,967
     
(1,373
)
Rhyz other
    (5,942 )     (1,960 )
Total Rhyz Investments
    (3,975 )     (3,333 )
Total segment contribution
   
69,170
     
86,955
 
Corporate and other
   
(60,348
)
   
(70,891
)
Operating income
   
8,822
     
16,064
 
Interest expense     7,325       4,888  
Other income (expense), net
   
(396
)
   
3,412
 
Income before provision for income taxes
 
$
1,101
   
$
14,588
 

Depreciation and Amortization

 
Three Months Ended
March 31,
 
(U.S. dollars in thousands)
 
2024
   
2023
 
Nu Skin
           
Americas
 
$
105
   
$
66
 
Mainland China
    2,774       2,775  
Southeast Asia/Pacific
    249       280  
Japan
    81       1,054  
Europe & Africa
   
273
     
282
 
South Korea
    245       453  
Hong Kong/Taiwan
   
579
     
453
 
Total Nu Skin
   
4,306
     
5,363
 
Rhyz Investments
               
Manufacturing
   
3,335
     
3,424
 
Rhyz other
   
1,886
     
592
 
Total Rhyz Investments
    5,221       4,016  
Corporate and other
   
8,910
     
7,604
 
Total
 
$
18,437
   
$
16,983
 

Capital Expenditures

 
Three Months Ended
March 31,
 
(U.S. dollars in thousands)
 
2024
   
2023
 
Nu Skin
           
Americas