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, 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 April 30, 2023, 49,905,275 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 2023

TABLE OF CONTENTS

   
Page
Part I.
Financial Information
 
 
Item 1.
 
   
1
   
2
   
3
   
4
   
5
   
6
 
Item 2.
17
 
Item 3.
25
 
Item 4.
25
       
Part II.
Other Information
 
 
Item 1.
26
 
Item 1A.
26
 
Item 2.
26
 
Item 3.
26
 
Item 4.
26
 
Item 5.
26
 
Item 6.
27
       
  28

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

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

PART I.  FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

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

 
March 31,
2023
   
December 31,
2022
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
229,941
   
$
264,725
 
Current investments
   
16,774
     
13,784
 
Accounts receivable, net
   
60,008
     
47,360
 
Inventories, net
   
366,537
     
346,183
 
Prepaid expenses and other
   
100,302
     
87,816
 
Total current assets
   
773,562
     
759,868
 
                 
Property and equipment, net
   
437,986
     
444,806
 
Operating lease right-of-use assets
   
98,683
     
98,734
 
Goodwill
   
206,432
     
206,432
 
Other intangible assets, net
   
64,711
     
66,701
 
Other assets
   
243,271
     
244,429
 
Total assets
 
$
1,824,645
   
$
1,820,970
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
49,494
   
$
53,963
 
Accrued expenses
   
275,774
     
280,280
 
Current portion of long-term debt
   
47,500
     
25,000
 
Total current liabilities
   
372,768
     
359,243
 
                 
Operating lease liabilities
   
78,776
     
76,540
 
Long-term debt
   
372,609
     
377,466
 
Other liabilities
   
107,522
     
110,425
 
Total liabilities
   
931,675
     
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
   
611,483
     
613,278
 
Treasury stock, at cost – 40.7 million and 41.1 million shares
   
(1,559,080
)
   
(1,569,061
)
Accumulated other comprehensive loss
   
(91,005
)
   
(86,509
)
Retained earnings
   
1,931,481
     
1,939,497
 
Total stockholders’ equity
   
892,970
     
897,296
 
Total liabilities and stockholders’ equity
 
$
1,824,645
   
$
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
March 31,
 
   
2023
   
2022
 
Revenue
 
$
481,462
   
$
604,899
 
Cost of sales
   
133,588
     
161,499
 
Gross profit
   
347,874
     
443,400
 
                 
Operating expenses:
               
Selling expenses
   
188,124
     
242,699
 
General and administrative expenses
   
133,899
     
148,556
 
Restructuring and impairment expenses
    9,787        
Total operating expenses
   
331,810
     
391,255
 
                 
Operating income
   
16,064
     
52,145
 
Other income (expense), net
   
(1,476
)
   
(1,453
)
                 
Income before provision for income taxes
   
14,588
     
50,692
 
Provision for income taxes
   
3,212
     
11,976
 
                 
Net income
 
$
11,376
   
$
38,716
 
                 
Net income per share (Note 6):
               
Basic
 
$
0.23
   
$
0.77
 
Diluted
 
$
0.23
   
$
0.76
 
                 
Weighted-average common shares outstanding (000s):
               
Basic
   
49,644
     
49,991
 
Diluted
   
50,058
     
51,066
 

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,
 
   
2023
   
2022
 
Net income
 
$
11,376
   
$
38,716
 
                 
Other comprehensive (loss) income, net of tax:
               
Foreign currency translation adjustment, net of taxes of $(68) and $(7) for the three months ended March 31, 2023 and 2022, respectively
   
(2,139
)
   
(1,960
)
Net unrealized gains/(losses) on cash flow hedges, net of taxes of $175 and $(1,743) for the three months ended March 31, 2023 and 2022, respectively
   
(635
)
   
6,314
 
Reclassification adjustment for realized losses/(gains) in current earnings, net of taxes of $475 and $(4) for the three months ended March 31, 2023 and 2022, respectively
   
(1,722
)
   
14
 
     
(4,496
)
   
4,368
 
Comprehensive income
 
$
6,880
   
$
43,084
 

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, 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
)
Repurchase of Class A common stock (Note 6)
   
     
     
     
     
     
 
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
 

 
For the Three Months Ended March 31, 2022
 
   
Class A
Common
Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Retained
Earnings
   
Total
 
Balance at January 1, 2022
 
$
91
   
$
601,703
   
$
(1,526,860
)
 
$
(73,896
)
 
$
1,911,734
   
$
912,772
 
                                                 
Net income
   
     
     
     
     
38,716
     
38,716
 
Other comprehensive income, net of tax
   
     
     
     
4,368
     
     
4,368
 
Repurchase of Class A common stock (Note 6)
   
     
     
(10,006
)
   
     
     
(10,006
)
Exercise of employee stock options (0.4 million shares)/vesting of stock awards
   
     
(6,572
)
   
10,088
     
     
     
3,516
 
Stock-based compensation
   
     
4,127
     
     
     
     
4,127
 
Cash dividends
   
     
     
     
     
(19,293
)
   
(19,293
)
Balance at March 31, 2022
 
$
91
   
$
599,258
   
$
(1,526,778
)
 
$
(69,528
)
 
$
1,931,157
   
$
934,200
 

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,
 
   
2023
   
2022
 
Cash flows from operating activities:
           
Net income
 
$
11,376
   
$
38,716
 
Adjustments to reconcile net income to cash flows from operating activities:
               
Depreciation and amortization
   
16,983
     
17,130
 
Non-cash lease expense
   
8,566
     
10,581
 
Stock-based compensation
   
4,002
     
4,127
 
Foreign currency (gains)/losses
   
(2,102
)
   
370
 
(Gain)/loss on disposal of assets
   
(17
)
   
517
 
Deferred taxes
   
(72
)
   
3,292
 
Changes in operating assets and liabilities:
               
Accounts receivable, net
   
(15,336
)
   
(12,463
)
Inventories, net
   
(19,734
)
   
17,212
 
Prepaid expenses and other
   
(12,895
)
   
(18,110
)
Other assets
   
(864
)
   
941
 
Accounts payable
   
(4,495
)
   
(5,663
)
Accrued expenses
   
(4,129
)
   
(40,270
)
Other liabilities
   
(3,360
)
   
(8,839
)
Net cash (used in) / provided by operating activities
   
(22,077
)
   
7,541
 
                 
Cash flows from investing activities:
               
Purchases of property and equipment
   
(11,487
)
   
(10,279
)
Proceeds on investment sales
   
4,986
     
4,076
 
Purchases of investments
   
(8,195
)
   
(3,930
)
Net cash used in investing activities
   
(14,696
)
   
(10,133
)
                 
Cash flows from financing activities:
               
Exercise of employee stock options and taxes paid related to the net shares settlement of stock awards
   
4,184
     
3,516
 
Payment of cash dividends
   
(19,392
)
   
(19,293
)
Repurchases of shares of common stock
   
     
(10,006
)
Finance lease principal payments
   
(912
)
   
(476
)
Payments of debt
   
(2,500
)
   
(7,500
)
Proceeds from debt
   
20,000
     
 
Net cash provided by/(used in) financing activities
   
1,380
     
(33,759
)
                 
Effect of exchange rate changes on cash
   
609
     
(1,026
)
                 
Net decrease in cash and cash equivalents
   
(34,784
)
   
(37,377
)
                 
Cash and cash equivalents, beginning of period
   
264,725
     
339,593
 
                 
Cash and cash equivalents, end of period
 
$
229,941
   
$
302,216
 

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 Australia, Indonesia, Malaysia, New Zealand, the Philippines, Singapore, Thailand and Vietnam; South Korea; Japan; Europe, Middle East and Africa (“EMEA”), which includes markets in Europe as well as Israel and 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 significant intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial information as of March 31, 2023, and for the three-month periods ended March 31, 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):

 
March 31,
2023
   
December 31,
2022
 
Raw materials
 
$
175,579
   
$
163,797
 
Finished goods
   
190,958
     
182,386
 
Total Inventory, net
 
$
366,537
   
$
346,183
 

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, 2023 and December 31, 2022 was $17.4 million and $18.7 million, respectively. The contract liabilities impact to revenue for the three-month periods ended March 31, 2023, and 2022 was an increase of $1.3 million and an increase of $1.2 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 the reporting units were determined to be in excess of its carrying amounts and no goodwill 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 March 31, 2023 and December 31, 2022 (U.S. dollars in thousands):

 
March 31,
2023
   
December 31,
2022
 
Nu Skin
           
Americas
 
$
9,449
   
$
9,449
 
South Korea     29,261       29,261  
Mainland China
   
32,179
     
32,179
 
Southeast Asia/Pacific
   
18,537
     
18,537
 
Japan
   
16,019
     
16,019
 
EMEA
   
2,875
     
2,875
 
Hong Kong/Taiwan
   
6,634
     
6,634
 
Rhyz Investments
               
Manufacturing
   
78,875
     
78,875
 
Rhyz Other
   
12,603
     
12,603
 
Total
 
$
206,432
   
$
206,432
 

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, 2023, 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, 2023 and December 31, 2022:

Facility or
Arrangement
 
Original
Principal
Amount
 
Balance as of
March 31,
2023 (1)(2)
 
Balance as of
December 31,
2022 (1)(2)
 
Interest
Rate
 
Repayment
Terms
Credit Agreement term loan facility
 
$400.0 million
 
$392.5 million
 
 
$395.0 million
 
Variable 30 day: 6.91%
 
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
     
$30.0 million
 
$10.0 million
 
Variable 30 day: 6.83%
 
Revolving line of credit expires June 14, 2027.

(1)
As of March 31, 2023 and December 31, 2022, the current portion of the Company’s debt (i.e., becoming due in the next 12 months) included $17.5 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 $2.4 million and $2.5 million as of March 31, 2023 and December 31, 2022, respectively, related to the Credit Agreement, which are not reflected in this table.

5.
Leases

As of March 31, 2023, the weighted average remaining lease term was 8.8 and 4.4 years for operating and finance leases, respectively. As of March 31, 2023, the weighted average discount rate was 3.3% and 3.6% for operating and finance leases, respectively.

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

 
Three Months Ended
March 31,
 
   
2023
   
2022
 
Operating lease expense
           
Operating lease cost
 
$
8,161
   
$
10,439
 
Variable lease cost
   
1,075
     
1,157
 
Short-term lease cost
   
     
30
 
Finance lease expense
               
Amortization of right-of-use assets
   
1,000
     
556
 
Interest on lease liabilities
   
134
     
66
 
Total lease expense
 
$
10,370
   
$
12,248
 

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

 
Three Months Ended
March 31,
 
   
2023
   
2022
 
Operating cash outflow from operating leases
 
$
8,150
   
$
10,405
 
Operating cash outflow from finance leases
 
$
132
   
$
68
 
Financing cash outflow from finance leases
 
$
912
   
$
476
 
Right-of-use assets obtained in exchange for operating lease obligations
 
$
7,981
   
$
23,730
 
Right-of-use assets obtained in exchange for finance lease obligations
 
$
520
   
$
 

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

Year Ending December 31
 
Operating
Leases
   
Finance
Leases
 
2023
 
$
18,542
   
$
2,875
 
2024
   
20,249
     
3,474
 
2025
   
14,916
     
3,400
 
2026
   
10,241
     
3,305
 
2027
   
7,885
     
2,953
 
Thereafter
   
43,851
     
 
Total
   
115,684
     
16,007
 
Less: Finance charges
   
15,200
     
1,269
 
Total principal liability
 
$
100,484
   
$
14,738
 

The Company has additional lease liabilities of $1.3 million which have not yet commenced as of March 31, 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 March 31, 2023 and 2022, the only dilutive common shares outstanding relate to the Company’s outstanding stock awards and options. For the three-month periods ended March 31, 2023 and 2022, stock options of 0.1 million and 0.1 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

Dividends

In February 2023, the Company’s board of directors declared a quarterly cash dividend of $0.39 per share. This quarterly cash dividend of $19.4 million was paid on March 8, 2023 to stockholders of record on February 27, 2023. In April 2023, the board of directors declared a quarterly cash dividend of $0.39 per share to be paid on June 7, 2023 to stockholders of record on May 26, 2023.

Repurchase of common stock

During the three-month periods ended March 31, 2023 and 2022, the Company repurchased zero and 0.2 million shares of its Class A common stock under its stock repurchase plans for zero and $10.0 million, respectively.  As of March 31, 2023, $175.4 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, 2023
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets (liabilities):
                       
Cash equivalents and current investments
 
$
46,632
   
$
   
$
   
$
46,632
 
Derivative financial instruments asset
   
     
16,731
     
     
16,731
 
Life insurance contracts
   
     
     
42,053
     
42,053
 
Contingent consideration
   
     
     
(6,271
)
   
(6,271
)
Total
 
$
46,632
   
$
16,731
   
$
35,782
   
$
99,145
 

 
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
 
Actual return on plan assets
   
1,998
     
(3,401
)
Ending balance at March 31
 
$
42,053
   
$
46,450
 

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):

   
2023
   
2022
 
Beginning balance at January 1
 
$
(6,364
)
 
$
(10,341
)
Changes in fair value of contingent consideration
   
93
     
115
Ending balance at March 31
 
$
(6,271
)
 
$
(10,226
)

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, 2023 and December 31, 2022. 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 2023 was $3.2 million, compared to $12.0 million for the prior-year period. The effective tax rates for the first quarter 2023 was 22.0% of pre-tax income compared to 23.6% 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 $91.8 million and $89.3 million as of March 31, 2023 and December 31, 2022, 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, 2022. If the amount designated as indefinitely reinvested as of December 31, 2022 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, 2022, tax years through 2020 have been audited and are effectively closed to further examination. For tax years 2021 and 2023, the Company is in the Bridge phase of the CAP program, pursuant to which the IRS will not accept disclosures, will not conduct reviews and will not provide letters of assurance for the Bridge years. There are limited circumstances that tax years in the Bridge phase will be opened for examination. For tax year 2022, the Company has accepted an invitation to participate in the IRS’s new pilot program, Bridge Plus. 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 2019. Foreign jurisdictions have varying lengths of statues 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 $3.0 to $4.0 million.

9.
Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  During 2023, 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 $8.8 million will be reclassified as a reduction to interest expense.

As of March 31, 2023 and December 31, 2022, 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,
2023
   
December 31,
2022
 
Interest Rate Swap - Asset
Prepaid expenses and other
 
$
8,814
   
$
9,156
 
Interest Rate Swap - Asset
Other assets
 
$
7,917
   
$
10,582
 

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:
 
2023
   
2022
 
Interest Rate Swaps
 
$
(810
)
 
$
8,057
 

   
Amount of Gain (Loss)
Reclassified from Accumulated
Other Comprehensive Loss into Income
 
      
Three Months Ended
 
Derivatives in Cash flow
Income Statement
 
March 31,
 
Hedging Relationships:
Location
 
2023
   
2022
 
Interest Rate Swaps
Other income (expense), net
 
$
2,197
   
$
(18
)

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, EMEA, and Hong Kong/Taiwan—and two Rhyz Investments segments—Manufacturing and Rhyz other. The Nu Skin other category includes miscellaneous corporate revenue and related adjustments. The Rhyz other segment includes other investments by our Rhyz strategic investment arm. These segments reflect the way the chief operating decision maker evaluates the Company’s business performance and allocates resources. Reported revenue includes only the revenue generated by sales to external customers.

Profitability by segment as determined under US GAAP is driven primarily by the Company’s transfer pricing policies. Segment contribution, which is the Company’s segment profitability metric presented in the table below, excludes certain intercompany charges, specifically royalties, license fees, transfer pricing, discrete charges and other miscellaneous items. These charges have been included in Corporate and other expenses. Corporate and other expenses also include costs related to the Company’s executive and administrative offices, information technology, research and development, and marketing and supply chain functions not recorded at the segment level.


In the first quarter of 2023, the Company adjusted how it allocates certain corporate overhead costs to the segments. The prior-year segment information has been recast to comply with current presentation. Consolidated financial information is not affected.

The accounting policies of the segments are the same as those described in Note 2 – Summary of Significant Accounting Policies. The Company evaluates the performance of its segments based on revenue and segment contribution. Each segment records direct expenses related to its employees and its operations.

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)
 
2023
   
2022
 
Nu Skin
           
Americas
 
$
101,157
   
$
123,580
 
       South Korea     70,324       72,133  
       Mainland China     67,976       124,495  
Southeast Asia/Pacific
    67,810       90,236  
Japan
    52,606
      61,791
 
EMEA
   
47,444
      52,968
 
Hong Kong/Taiwan
   
34,548
     
38,494
 
Other
   
(115
)
   
620
 
Total Nu Skin
   
441,750
     
564,317
 
Rhyz Investments
               
Manufacturing (1)
   
35,767
     
40,341
 
Rhyz other
   
3,945
     
241
 
Total Rhyz Investments
    39,712
      40,582
 
Total
 
$
481,462
   
$
604,899
 

(1)
The Rhyz Investments Manufacturing segment had $11.8 million and $14.6 million of intersegment revenue for the three-month period ended March 31, 2023 and 2022, 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)
 
2023
   
2022
 
Nu Skin
           
Americas
 
$
16,250
   
$
21,951
 
       South Korea     23,575       21,998  
       Mainland China     13,612       28,995  
Southeast Asia/Pacific
    12,471       20,996  
Japan
   
12,908
     
14,420
 
EMEA
    3,638       2,622  
Hong Kong/Taiwan
   
7,834
     
8,086
 
Nu Skin contribution
   
90,288
     
119,068
 
Rhyz Investments
               
Manufacturing
   
(1,373
)
   
3,292
 
Rhyz other
    (1,960 )     (1,046 )
Total Rhyz Investments
    (3,333 )     2,246  
Total segment contribution
   
86,955
     
121,314
 
Corporate and other
   
(70,891
)
   
(69,169
)
Operating income
   
16,064
     
52,145
 
Other income (expense), net
   
(1,476
)
   
(1,453
)
Income before provision for income taxes
 
$
14,588
   
$
50,692
 

Depreciation and Amortization

 
Three Months Ended
March 31,
 
(U.S. dollars in thousands)
 
2023
   
2022
 
Nu Skin
           
Americas
 
$
66
   
$
199
 
       South Korea
    453       388  
       Mainland China     2,775       2,884  
Southeast Asia/Pacific
    280       381  
Japan
   
1,054
     
277
 
EMEA
    282       230  
Hong Kong/Taiwan
   
453
     
691
 
Total Nu Skin
   
5,363
     
5,050
 
Rhyz Investments
               
Manufacturing
   
3,424
     
3,330
 
Rhyz other
   
592
     
592
 
Total Rhyz Investments
    4,016       3,922  
Corporate and other
   
7,604
     
8,158
 
Total
 
$
16,983
   
$
17,130
 

Capital Expenditures

 
Three Months Ended
March 31,
 
(U.S. dollars in thousands)
 
2023
   
2022
 
Nu Skin
           
Americas
 
$
100
   
$
42
 
        South Korea     154       362  
        Mainland China     4,035       4,068  
Southeast Asia/Pacific
    64       68  
Japan
   
5
       
EMEA
    119       393  
Hong Kong/Taiwan
   
260
     
263
 
Total Nu Skin
   
4,737
     
5,196
 
Rhyz Investments
               
Manufacturing
   
1,481
     
1,208
 
Rhyz other
           
Total Rhyz Investments
    1,481       1,208  
Corporate and other
   
5,269
     
3,875
 
Total
 
$
11,487
   
$
10,279
 

11.
Commitments and Contingencies

The Company is subject to government regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and the Company’s direct selling system.  The Company is also subject to the jurisdiction of numerous foreign tax and customs authorities. Any assertions or determination that either the Company or the Company’s sales force is not in compliance with existing statutes, laws, rules or regulations could have a material adverse effect on the Company’s operations. In addition, in any country or jurisdiction, the adoption of new statutes, laws, rules or regulations or changes in the interpretation of existing statutes, laws, rules or regulations could have a material adverse effect on the Company and its operations. No assurance can be given that the Company’s compliance with applicable statutes, laws, rules and regulations will not be challenged by foreign authorities or that such challenges will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. The Company and its Subsidiaries are defendants in litigation, investigations and other proceedings involving various matters. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

The Company is subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. The Company believes it has appropriately provided for income taxes for all years. Several factors drive the calculation of its tax reserves. Some of these factors include: (i) the expiration of various statutes of limitations; (ii) changes in tax law and regulations; (iii) issuance of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors may result in adjustments to the Company’s reserves, which would impact its reported financial results.

12.
Restructuring

In 2021, the Company determined to exit the Grow Tech segment, to better align its resources on key strategic initiatives to achieve the future growth objectives and priorities of the core Nu Skin business. The Grow Tech segment was pursuing the commercialization of controlled-environment agriculture for use in the agriculture feed industry. This segment has been operating as part of the Company's Rhyz strategic investment arm. As a result of the restructuring program, the Company recorded a non-cash charge of $38.5 million in 2021, including $9.2 million for impairment of goodwill, $9.0 million for impairment of intangibles, $13.7 million of fixed asset impairments and $6.6 million for inventory write-off, and $20.0 million of cash charges, including $6.5 million for employee severance and $13.5 million for other related cash charges with our restructuring. The restructuring charges were recorded in our previous Grow Tech segment, which has been recast to Corporate & Other. During the first three quarters of 2022, the Company made cash payments totaling $20.0 million, with $11.6 million in the first quarter of 2022. During the fourth quarter of 2022, the Company incurred $5.0 million in incremental charges to be settled in cash associated with the exit activities and legal settlements, leaving an ending accrual of $5.0 million as of December 31, 2022. The Company paid this amount during the first quarter of 2023, leaving no restructuring accrual related to our exit of the Grow Tech segment as of March 31, 2023.



In the third quarter of 2022, the Company adopted a strategic plan to focus resources on the Company’s strategic priorities and optimize future growth and profitability. The global program includes workforce reductions and footprint optimization. The Company estimates total charges under the program will approximate $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 impairment of other intangibles related to the footprint optimization. The Company expects to substantially complete the program during the first half of 2023. During the back half of 2022, the Company 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 2022, the Company made cash payments of $21.0 million related to this global program, leaving an ending restructuring accrual of $11.7 million. During the first quarter of 2023, the Company 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. During the first quarter of 2023, the Company made cash payments of $7.9 million related to this global program, leaving an ending restructuring accrual of $11.9 million.



Restructuring expense by segment


(U.S. dollars in thousands)
 
Three Months Ended
March 31, 2023
 
Nu Skin
     
Americas
 
$
918
 
        South Korea     422  
Mainland China
   
1,352
 
Southeast Asia/Pacific
   
131
 
Japan
   
1,515
 
EMEA
   
(113
)
Hong Kong/Taiwan
   
(201
)
Total Nu Skin
   
4,024
 
Rhyz Investments
       
Manufacturing
   
13
 
Rhyz other
   
 
Total Rhyz Investments
   
13
 
Corporate and other