10-Q 1 ef20012449_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 SEPTEMBER 30, 2023

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 October 31, 2023, 49,409,268 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 – THIRD QUARTER 2023

TABLE OF CONTENTS

   
Page
Part I.
Financial Information
 
 
Item 1.
 
   
1
   
2
   
3
   
4
   
6
   
7
 
Item 2.
19
 
Item 3.
28
 
Item 4.
28
       
       
Part II.
Other Information
 
 
Item 1.
29
 
Item 1A.
29
 
Item 2.
30
 
Item 3.
30
 
Item 4.
30
 
Item 5.
30
 
Item 6.
31
       
 
32

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)

 
September 30,
2023
   
December 31,
2022
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
233,314
   
$
264,725
 
Current investments
   
16,673
     
13,784
 
Accounts receivable, net
   
77,251
     
47,360
 
Inventories, net
   
291,103
     
346,183
 
Prepaid expenses and other
   
82,781
     
87,816
 
Total current assets
   
701,122
     
759,868
 
                 
Property and equipment, net
   
428,932
     
444,806
 
Operating lease right-of-use assets
   
86,315
     
98,734
 
Goodwill
   
229,469
     
206,432
 
Other intangible assets, net
   
108,972
     
66,701
 
Other assets
   
238,281
     
244,429
 
Total assets
 
$
1,793,091
   
$
1,820,970
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
48,583
   
$
53,963
 
Accrued expenses
   
245,432
     
280,280
 
Current portion of long-term debt
   
140,000
     
25,000
 
Total current liabilities
   
434,015
     
359,243
 
                 
Operating lease liabilities
   
68,208
     
76,540
 
Long-term debt
   
362,896
     
377,466
 
Other liabilities
   
105,785
     
110,425
 
Total liabilities
   
970,904
     
923,674
 
                 
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
   
619,193
     
613,278
 
Treasury stock, at cost – 41.2 million and 41.1 million shares
   
(1,570,718
)
   
(1,569,061
)
Accumulated other comprehensive loss
   
(108,836
)
   
(86,509
)
Retained earnings
   
1,882,457
     
1,939,497
 
Total stockholders’ equity
   
822,187
     
897,296
 
Total liabilities and stockholders’ equity
 
$
1,793,091
   
$
1,820,970
 

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
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
Revenue
 
$
498,772
   
$
537,805
   
$
1,480,491
   
$
1,703,319
 
Cost of sales
   
206,505
     
173,500
     
475,635
     
483,099
 
Gross profit
   
292,267
     
364,305
     
1,004,856
     
1,220,220
 
                                 
Operating expenses:
                               
Selling expenses
   
187,750
     
216,478
     
561,039
     
678,603
 
General and administrative expenses
   
130,882
     
137,987
     
401,825
     
428,105
 
Restructuring and impairment expenses
          30,124       9,787       30,124  
Total operating expenses
   
318,632
     
384,589
     
972,651
     
1,136,832
 
                                 
Operating income (loss)
   
(26,365
)
   
(20,284
)
   
32,205
     
83,388
 
Other expense, net
   
(8,086
)
   
(8,680
)
   
(14,955
)
   
(18,773
)
                                 
Income (loss) before provision for income taxes
   
(34,451
)
   
(28,964
)
   
17,250
     
64,615
 
Provision (benefit) for income taxes
   
2,504
     
(3,574
)
   
15,937
     
17,052
 
                                 
Net income (loss)
 
$
(36,955
)
 
$
(25,390
)
 
$
1,313
   
$
47,563
 
                                 
Net income (loss) per share (Note 6):
                               
Basic
 
$
(0.74
)
 
$
(0.51
)
 
$
0.03
   
$
0.95
 
Diluted
 
$
(0.74
)
 
$
(0.51
)
 
$
0.03
   
$
0.94
 
                                 
Weighted-average common shares outstanding (000s):
                               
Basic
   
49,859
     
50,199
     
49,812
     
50,187
 
Diluted
   
49,859
     
50,199
     
50,029
     
50,822
 

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
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
Net income (loss)
 
$
(36,955
)
 
$
(25,390
)
 
$
1,313
   
$
47,563
 
                                 
Other comprehensive loss, net of tax:
                               
Foreign currency translation adjustment, net of taxes of zero and $(10) for the three months ended September 30, 2023 and 2022, respectively, and $(68) and $19 for the nine months ended September 30, 2023 and 2022, respectively
   
(6,518
)
   
(22,502
)
   
(20,196
)
   
(46,914
)
Net unrealized gains/(losses) on cash flow hedges, net of taxes of $(328) and $(1,262) for the three months ended September 30, 2023 and 2022, respectively and $(990) and $(3,441) for the nine months ended September 30, 2023 and 2022, respectively
   
1,187
     
4,570
     
3,583
     
12,462
 
Reclassification adjustment for realized losses/(gains) in current earnings on cash flow hedges, net of taxes of $569 and $225 for the three months ended September 30, 2023 and 2022, respectively and $1,577 and $286 for the nine months ended September 30, 2023 and 2022, respectively
   
(2,059
)
   
(815
)
   
(5,714
)
   
(1,037
)
     
(7,390
)
   
(18,747
)
   
(22,327
)
   
(35,489
)
Comprehensive income (loss)
 
$
(44,345
)
 
$
(44,137
)
 
$
(21,014
)
 
$
12,074
 

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 September 30, 2023
 
   
Class A
Common
Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated Other
Comprehensive Loss
   
Retained
Earnings
   
Total
 
Balance at July 1, 2023
 
$
91
   
$
615,579
   
$
(1,557,777
)
 
$
(101,446
)
 
$
1,938,898
   
$
895,345
 
                                                 
Net loss
   
     
     
     
     
(36,955
)
   
(36,955
)
Other comprehensive loss, net of tax
   
     
     
     
(7,390
)
   
     
(7,390
)
Repurchase of Class A common stock (Note 6)                 (13,011 )                 (13,011 )
Exercise of employee stock options (0.1 million shares)/vesting of stock awards
   
     
(111
)
   
70
     
     
     
(41
)
Stock-based compensation
   
     
3,725
     
     
     
     
3,725
 
Cash dividends
   
     
     
     
     
(19,486
)
   
(19,486
)
Balance at September 30, 2023
 
$
91
   
$
619,193
   
$
(1,570,718
)
 
$
(108,836
)
 
$
1,882,457
   
$
822,187
 

 
For the Three Months Ended September 30, 2022
 
   
Class A
Common
Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated Other
Comprehensive Loss
   
Retained
Earnings
   
Total
 
Balance at July 1, 2022
 
$
91
   
$
606,349
   
$
(1,520,769
)
 
$
(90,638
)
 
$
1,946,002
   
$
941,035
 
                                                 
Net loss
   
     
     
     
     
(25,390
)
   
(25,390
)
Other comprehensive loss, net of tax
   
     
     
     
(18,747
)
   
     
(18,747
)
Repurchase of Class A common stock (Note 6)
   
     
     
(40,028
)
   
     
     
(40,028
)
Exercise of employee stock options (0.1 million shares)/vesting of stock awards
   
     
366
     
830
     
     
     
1,196
 
Stock-based compensation
   
     
3,171
     
     
     
     
3,171
 
Cash dividends
   
     
     
     
     
(19,303
)
   
(19,303
)
Balance at September 30, 2022
 
$
91
   
$
609,886
   
$
(1,559,967
)
 
$
(109,385
)
 
$
1,901,309
   
$
841,934
 

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 Nine Months Ended September 30, 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
   
     
     
     
     
1,313
     
1,313
 
Other comprehensive loss, net of tax
   
     
     
     
(22,327
)
   
     
(22,327
)
Repurchase of Class A common stock (Note 6)
                (13,011 )                 (13,011 )
Exercise of employee stock options (0.5 million shares)/vesting of stock awards
   
     
(6,613
)
   
11,354
     
     
     
4,741
 
Stock-based compensation
   
     
12,528
     
     
     
     
12,528
 
Cash dividends
   
     
     
     
     
(58,353
)
   
(58,353
)
Balance at September 30, 2023
 
$
91
   
$
619,193
   
$
(1,570,718
)
 
$
(108,836
)
 
$
1,882,457
   
$
822,187
 

 
For the Nine Months Ended September 30, 2022
 
   
Class A
Common
Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated Other
Comprehensive Loss
   
Retained
Earnings
   
Total
 
Balance at January 1, 2022
 
$
91
   
$
601,703
   
$
(1,526,860
)
 
$
(73,896
)
 
$
1,911,734
   
$
912,772
 
                                                 
Net income
   
     
     
     
     
47,563
     
47,563
 
Other comprehensive loss, net of tax
   
     
     
     
(35,489
)
   
     
(35,489
)
Repurchase of Class A common stock (Note 6)
   
     
     
(60,038
)
   
     
     
(60,038
)
Exercise of employee stock options (1.2 million shares)/vesting of stock awards
   
     
(1,137
)
   
26,931
     
     
     
25,794
 
Stock-based compensation
   
     
9,320
     
     
     
     
9,320
 
Cash dividends
   
     
     
     
     
(57,988
)
   
(57,988
)
Balance at September 30, 2022
 
$
91
   
$
609,886
   
$
(1,559,967
)
 
$
(109,385
)
 
$
1,901,309
   
$
841,934
 

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)

 
Nine Months Ended
September 30,
 
   
2023
   
2022
 
Cash flows from operating activities:
           
Net income
 
$
1,313
   
$
47,563
 
Adjustments to reconcile net income to cash flows from operating activities:
               
Depreciation and amortization
   
52,339
     
53,935
 
Non-cash lease expense
   
24,967
     
33,250
 
Stock-based compensation
   
12,528
     
9,320
 
Inventory write-down (1)
    83,642       37,862  
Foreign currency losses
   
169
     
7,077
 
Loss on disposal of assets
   
626
     
568
 
Deferred taxes
   
(9,969
)
   
2,483
 
Impairment of fixed assets and other intangibles
          9,916  
Changes in operating assets and liabilities:
               
Accounts receivable, net
   
(27,829
)
   
(15,523
)
Inventories, net
   
(25,901
)
   
10,560
 
Prepaid expenses and other
   
4,227
     
(6,801
)
Other assets
   
(432
)
   
8,030
 
Accounts payable
   
(4,667
)
   
(1,224
)
Accrued expenses
   
(43,062
)
   
(95,928
)
Other liabilities
   
(3,479
)
   
(18,551
)
Net cash provided by operating activities
   
64,472
     
82,537
 
                 
Cash flows from investing activities:
               
Purchases of property and equipment
   
(38,105
)
   
(45,274
)
Proceeds on investment sales
   
13,160
     
5,535
 
Purchases of investments
   
(16,883
)
   
(13,955
)
Acquisitions (net of cash acquired)
    (77,275 )      
Net cash used in investing activities
   
(119,103
)
   
(53,694
)
                 
Cash flows from financing activities:
               
Exercise of employee stock options and taxes paid related to the net shares settlement of stock awards
   
4,741
     
25,794
 
Payment of cash dividends
   
(58,353
)
   
(57,988
)
Repurchases of shares of common stock
   
(13,011
)
   
(60,038
)
Finance lease principal payments
   
(2,382
)
   
(1,401
)
Payment of debt issuance costs
          (5,077 )
Payments of debt
   
(10,000
)
   
(410,000
)
Proceeds from debt
   
110,000
     
460,000
 
Net cash provided by / (used in) financing activities
   
30,995
     
(48,710
)
                 
Effect of exchange rate changes on cash
   
(7,775
)
   
(25,590
)
                 
Net decrease in cash and cash equivalents
   
(31,411
)
   
(45,457
)
                 
Cash and cash equivalents, beginning of period
   
264,725
     
339,593
 
                 
Cash and cash equivalents, end of period
 
$
233,314
   
$
294,136
 

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

(1)
The nine months ended September 2022 has been recast from Inventories, net to comply with the current presentation.

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 Australia, Indonesia, Malaysia, New Zealand, the Philippines, Singapore, Thailand and Vietnam; South Korea; Japan; Europe and Africa, which includes markets in Europe as well as South Africa; and Hong Kong/Taiwan, which also includes Macau—and two Rhyz Investments segments—Manufacturing, which includes manufacturing and packaging subsidiaries it has acquired; and Rhyz other, which includes other investments by its Rhyz strategic investment arm (the Company’s subsidiaries operating within each segment are collectively referred to as the “Subsidiaries”).

2.
Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited consolidated financial statements include the accounts of the Company and its Subsidiaries. All 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 September 30, 2023, and for the three- and nine-month periods ended September 30, 2023 and 2022. 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, 2022 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, 2022.


Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for the effects of reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying US GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024. The amendments in ASU 2020-04 are elective and are effective upon issuance for all entities. The Company had previously elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. In the second quarter of 2022, the Company elected the hedge accounting expedient that allows an update to the hedged risk in active hedging relationships without de-designation as the Company’s debt transitioned to the Secured Overnight Financing Rate (“SOFR”). In the fourth quarter of 2022, the Company elected the hedge accounting expedient that allows an amendment to existing hedges without de-designation as the Company’s hedges transitioned to SOFR. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Inventory

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

 
September 30,
2023
   
December 31,
2022
 
Raw materials
 
$
159,807
   
$
163,797
 
Finished goods
   
131,296
     
182,386
 
Total Inventory, net
 
$
291,103
   
$
346,183
 

7

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
Beginning balance
 
$
41,017
   
$
20,211
   
$
37,267
   
$
18,643
 
Additions(1)
   
68,563
     
26,985
     
83,642
     
37,862
 
Disposals
   
(7,347)

   
(7,306)

   
(18,676)

   
(16,615)

Ending Balance
 
$
102,233
   
$
39,890
   
$
102,233
   
$
39,890
 

(1)
During the third quarter of 2023, the Company made the strategic decision to re-balance and narrow their product portfolio, which resulted in an incremental adjustment to the inventory carrying value. This resulted in an incremental reserve of $65.7 million. During the third quarter of 2022, the Company reserved an incremental $26.9 million of inventory.

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 September 30, 2023 and December 31, 2022 was $11.9 million and $18.7 million, respectively. The contract liabilities impact to revenue for the three-month periods ended September 30, 2023 and 2022 was an increase of $0.8 million and an increase of $0.7 million, respectively. The impact to revenue for the nine-month periods ended September 30, 2023, and 2022 was an increase of $6.8 million and an increase of $4.3 million, respectively.

3.
Goodwill

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

The Company completed the annual goodwill and indefinite-lived intangible asset impairment testing as of October 1, 2022, and concluded that the fair value of all reporting units were in excess of their carrying amounts and no impairment charge was required. As of the October 1, 2022 testing date, the fair value of the Manufacturing reporting unit was estimated to be approximately 8% in excess of its carrying amount, and therefore the reporting unit is considered to be at risk of future impairment. The Manufacturing reporting unit’s fair value remains sensitive to significant unfavorable changes in revenue, gross margin and discount rates that could negatively impact future analyses.
 
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the goodwill impairment tests will prove to be an accurate prediction of the future.  Although the Manufacturing reporting unit showed strong revenue growth in fiscal year 2020 and 2021, the fair value of the reporting unit in 2022 was negatively impacted by an increase in the discount rate due to the current interest rate environment, and lower near-term revenue projections. Current projections used for the Manufacturing reporting unit reflect revenue growth attributable to the continued expansion of capacity, continued intercompany sales to Nu Skin, and the recent acquisition of new customers. While historical performance and current expectations have resulted in fair values of the Manufacturing reporting unit in excess of carrying values, if the assumptions are not realized an impairment charge may be recorded in the future.

The following table presents goodwill allocated to the Company’s reportable segments for the periods ended September 30, 2023 and December 31, 2022 (U.S. dollars in thousands):

 
September 30,
2023
   
December 31,
2022
 
Nu Skin
           
Americas
 
$
9,449
   
$
9,449
 
Mainland China
   
32,179
     
32,179
 
Southeast Asia/Pacific
   
18,537
     
18,537
 
South Korea
    29,261       29,261  
Japan
   
16,019
     
16,019
 
Europe & Africa
   
2,875
     
2,875
 
Hong Kong/Taiwan
   
6,634
     
6,634
 
Rhyz Investments
               
Manufacturing
   
78,875
     
78,875
 
Rhyz other(1)
   
35,640
     
12,603
 
Total
 
$
229,469
   
$
206,432
 

(1)
The increase in Rhyz other goodwill relates to the second quarter of 2023 acquisitions. See Note - 12 Acquisitions for additional information.

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 September 30, 2023, the Company was in compliance with all covenants under the Credit Agreement.

The following table summarizes the Company’s debt facilities as of September 30, 2023 and December 31, 2022:

Facility or
Arrangement
 
Original
Principal
Amount
 
Balance as of
September 30,
2023 (1)(2)
 
Balance as of
December 31,
2022 (1)(2)
 
Interest
Rate
 
Repayment
Terms
Credit Agreement term loan facility
 
$400.0 million
 
$385.0 million
 
 
$395.0 million
 
Variable 30 day: 7.42%
 
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
     
$120.0 million
 
$10.0 million
 
Variable 30 day: 7.43%
 
Revolving line of credit expires June 14, 2027.

(1)
As of September 30, 2023 and December 31, 2022, the current portion of the Company’s debt (i.e., becoming due in the next 12 months) included $20.0 million and $15.0 million, respectively, of the balance of its term loan under the Credit Agreement.

(2)
The carrying value of the debt reflects the amounts stated in the above table, less debt issuance costs of $2.1 million and $2.5 million as of September 30, 2023 and December 31, 2022, respectively, related to the Credit Agreement, which are not reflected in this table.

5.
Leases

As of September 30, 2023, the weighted-average remaining lease term was 8.7 and 3.9 years for operating and finance leases, respectively. As of September 30, 2023, the weighted-average discount rate was 3.6% 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
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
Operating lease expense
                       
Operating lease cost
 
$
6,762
   
$
9,479
   
$
22,945
   
$
30,179
 
Variable lease cost
   
1,923
     
1,572
     
3,410
     
4,223
 
Short-term lease cost
   
     
84
     
     
181
 
Finance lease expense
                               
Amortization of right-of-use assets
   
1,240
     
530
     
3,843
     
1,632
 
Interest on lease liabilities
   
123
     
53
     
380
     
178
 
 Total lease expense
 
$
10,048
   
$
11,718
   
$
30,578
   
$
36,393
 

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

 
Nine Months Ended September 30,
 
   
2023
   
2022
 
Operating cash outflow from operating leases
 
$
21,975
   
$
28,880
 
Operating cash outflow from finance leases
 
$
360
   
$
170
 
Financing cash outflow from finance leases
 
$
2,382
   
$
1,401
 
Right-of-use assets obtained in exchange for operating lease obligations
 
$
14,351
   
$
28,785
 
Right-of-use assets obtained in exchange for finance lease obligations
 
$
782
   
$
203
 

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

Year Ending December 31
 
Operating
Leases
   
Finance
Leases
 
2023
 
$
5,967
   
$
903
 
2024
   
20,769
     
3,479
 
2025
   
14,696
     
3,293
 
2026
   
10,227
     
3,197
 
2027
   
7,658
     
2,844
 
Thereafter
   
43,097
     
 
Total
   
102,414
     
13,716
 
Less: Finance charges
   
14,204
     
986
 
Total principal liability
 
$
88,210
   
$
12,730
 

The Company has additional lease liabilities of $3.5 million which have not yet commenced as of September 30, 2023, and as such, have not been recognized on the consolidated balance sheets.

6.
Capital Stock

Net income per share

Net income per share is computed based on the weighted-average number of common shares outstanding during the periods presented. Additionally, diluted earnings per share data gives effect to all potentially dilutive common shares that were outstanding during the periods presented. For the three-month periods ended September 30, 2023 and 2022, stock options of 2.1 million and 0.5 million, respectively, and for the nine-month periods ended September 30, 2023 and 2022, stock options of 1.3 million and 0.1 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

Dividends

In February, May and July 2023, the Company’s board of directors declared quarterly cash dividends of $0.39 per share. These quarterly cash dividends of $19.4 million, $19.5 million and $19.5 million were paid on March 8, 2023, June 7, 2023 and September 6, 2023, respectively, to stockholders of record on February 27, 2023, May 26, 2023 and August 25, 2023, respectively. In October 2023, the Company’s board of directors declared a quarterly cash dividend of $0.39 per share to be paid on December 6, 2023 to stockholders of record on November 24, 2023.

Repurchase of common stock

During the three- and nine-month periods ended September 30, 2023, the Company repurchased 0.6 million shares of its Class A common stock under its stock repurchase plan for $13.0 million.  During the three- and nine-month periods ended September 30, 2022, the Company repurchased 1.0 million shares and 1.4 million shares of its Class A common stock under its stock repurchase plan for $40.0 million and $60.0 million, respectively.  As of September 30, 2023, $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 September 30, 2023
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets (liabilities):
                       
Cash equivalents and current investments
 
$
45,949
   
$
   
$
   
$
45,949
 
Derivative financial instruments asset
   
     
17,020
     
     
17,020
 
Life insurance contracts
   
     
     
41,913
     
41,913
 
Contingent consideration
   
     
     
(6,422
)
   
(6,422
)
Total
 
$
45,949
   
$
17,020
   
$
35,491
   
$
98,460
 

 
Fair Value at December 31, 2022
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets (liabilities):
                       
Cash equivalents and current investments
 
$
55,356
   
$
   
$
   
$
55,356
 
Derivative financial instruments asset
   
     
19,738
     
     
19,738
 
Life insurance contracts
   
     
     
40,055
     
40,055
 
Contingent consideration
   
     
     
(6,364
)
   
(6,364
)
Total
 
$
55,356
   
$
19,738
   
$
33,691
   
$
108,785
 

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):

   
2023
   
2022
 
Beginning balance at January 1
 
$
40,055
   
$
49,851