NU Skin Enterprises, Inc.: Form 10-Q for the period ended Jun 30, 2024

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws and include, but are not limited to, statements of management’s expectations regarding our performance, initiatives, strategies, product introductions and offerings, growth of our Rhyz business, acquisitions and the integration of acquired companies, growth, opportunities and risks; statements of projections regarding future sales, expenses, operating results, taxes and duties, capital expenditures, sources and uses of cash, foreign-currency fluctuations or devaluations, repatriation of undistributed earnings, and other financial items; statements of management’s expectations and beliefs regarding our markets and global economic conditions; statements regarding the payment of future dividends and stock repurchases; statements regarding the outcome of litigation, audits, investigations or other regulatory actions; statements regarding government policies and regulations relating to our industry, including government policies and regulations in or related to the United States and Mainland China; accounting estimates and assumptions; statements of belief; and statements of assumptions underlying any of the foregoing. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,” “optimistic,” “project,” “anticipate,” “determine,” “estimate,” “intend,” “plan,” “goal,” “objective,” “targets,” “become,” “likely,” “will,” “would,” “could,” “may,” “might,” the negative of these words and other similar words. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We caution and advise readers that these statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. For a summary of these risks, see the risk factors included in our Annual Report on Form 10-K for the 2023 fiscal year and in any of our subsequent Securities and Exchange Commission filings, including this Quarterly Report.

The following Management’s Discussion and Analysis should be read in conjunction with our consolidated financial statements and related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the 2023 fiscal year, and our other reports filed with the Securities and Exchange Commission through the date of this Quarterly Report.

Overview

Revenue for the three-month period ended June 30, 2024 decreased 12% to $439.1 million, compared to $500.3 million in the prior-year period, and revenue for the six-month period ended June 30, 2024 decreased 13% to $0.9 billion, compared to $1.0 billion in the prior-year period. Our revenue in the second quarter and first six months of 2024 was negatively impacted 4.2% and 4.0%, respectively, from foreign-currency fluctuations. Our Customers, Paid Affiliates and Sales Leaders declined 14%, 17% and 16%, respectively, on a year-over-year basis.

The declines in our second quarter and first six months of 2024 revenue were largely driven by continued macroeconomic pressures we’ve been facing in our core Nu Skin segments, which has negatively impacted consumer spending and customer acquisition. The declines in our core Nu Skin segments were partially offset by 32.3% and 43.3% revenue growth for the second quarter and first half of 2024, respectively, in our Rhyz segments, partially from acquisitions in the second quarter of 2023 as well as organic growth. Rhyz is a key component of our business, and we anticipate its continued growth in the coming years both on an absolute basis and as a percentage of our consolidated revenue. These companies enable us to diversify our revenue mix, serve more customers where they shop, and create synergies for our owned and partner brands. For our core Nu Skin segments, we remain optimistic for the remainder of the year with our third quarter Global Nu Skin L!VE, which was held in July 2024 in the United States for our Western markets and will be held in South Korea for our Eastern markets in September 2024. In addition, we expect to start the launch process for MYND360, our new brand taking a holistic approach to support cognitive health, in the third quarter of 2024.

Earnings per share for the second quarter of 2024 decreased 541% to $(2.38), compared to $0.54 in the prior-year period. Earnings per share for the first six months of 2024 decreased 414% to $(2.39), compared to $0.76 in the prior-year period. The decrease in earnings per share for the second quarter and first six months of 2024 is primarily driven by second quarter of 2024 restructuring and impairment charges of $149.4 million, along with the overall decline in revenue.

Segment Results

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

The following table sets forth revenue for the three- and six-month periods ended June 30, 2024 and 2023 for each of our reportable segments (U.S. dollars in thousands):

(1) Constant-currency revenue change is a non-GAAP financial measure. See “Non-GAAP Financial Measures,” below.

The following table sets forth segment contribution for the three- and six-month periods ended June 30, 2024 and 2023 for each of our reportable segments (U.S. dollars in thousands). Segment contribution excludes certain intercompany charges, specifically royalties, license fees, transfer pricing and other miscellaneous items. We use segment contribution to measure the portion of profitability that the segment managers have the ability to control for their respective segments. For additional information regarding our segments and the calculation of segment contribution, see Note 10 to the consolidated financial statements contained in this report.

21

The following tables provide information concerning the number of Customers, Paid Affiliates and Sales Leaders in our core Nu Skin business for the three-month periods ended June 30, 2024 and 2023.

• “Customers” are persons who have purchased directly from the Company during the three months ended as of the date indicated. Our Customer numbers include members of our sales force who made such a purchase, including Paid Affiliates and those who qualify as Sales Leaders, but they do not include consumers who purchase directly from members of our sales force.
• “Paid Affiliates” are any Brand Affiliates, as well as members of our sales force in Mainland China, who earned sales compensation during the three-month period. In all of our markets besides Mainland China, we refer to members of our independent sales force as “Brand Affiliates” because their primary role is to promote our brand and products through their personal social networks.
• “Sales Leaders” are the three-month average of our monthly Brand Affiliates, as well as sales employees and independent marketers in Mainland China, who achieved certain qualification requirements as of the end of each month of the quarter.

(1) The June 30, 2024 number is affected by a change in eligibility requirements for receiving certain rewards within our compensation structure, to more narrowly focus on those affiliates who are actively building a consumer base. See “Japan,” and “Southeast Asia/Pacific,” below. We plan to implement these changes in additional segments over the next several quarters.

Following is a narrative discussion of our results in each segment, which supplements the tables above.

Americas. The decline in revenue, Customers, Paid Affiliates and Sales Leaders in our Americas segment is attributable to the decline in momentum in our North America markets, while our Latin America markets continue to be challenged by macroeconomic issues. In connection with our transformation efforts, we experienced disruptions to our subscription sales in North America, which negatively impacted revenue. In the first quarter of 2024, we launched our new connected device, which generated approximately $21.7 million in revenue for the first half of 2024. In the third quarter of 2024 we expect to start the launch process for our new ageLOC TruFace Peptide Retinol Complex with advanced peptide technology. Our revenue for the second quarter and first half of 2024 was negatively impacted 6% by unfavorable foreign currency fluctuations.

The year-over-year decline in segment contribution for the second quarter of 2024 primarily reflects the decrease in revenue as well as 3.0 percentage point decline in gross margin, and a 4.7 percentage point increase in selling expenses partially offset by improvements in general and administrative expenses. The decline in gross margin for the second quarter of 2024 is primarily attributable to sales promotions during the quarter as well as sales mix. The increase in selling expenses for the second quarter of 2024 is primarily from sales mix, as our products have differing commission percentages assigned to them. The year-over-year decline in segment contribution for the first half of 2024 primarily reflects the decrease in revenue as well as a 2.5 percentage point increase in selling expenses, primarily from sales mix as well as increased pressure from our recent incentive programs.

Mainland China. Our Mainland China market continued to be challenged during the second quarter and first half of 2024, with ongoing macroeconomic factors and the associated decrease in consumer spending leading to declines in revenue. We anticipate issues related to the current Chinese-American relations and regulatory pressures as well as deflationary and other economic challenges persisting as the economy works to recover.

The year-over-year decrease in segment contribution for the second quarter and first half of 2024 primarily reflects lower revenue. In addition, our segment contribution was impacted by a 2.7 percentage point and 2.6 percentage point decrease in gross margin for the second quarter and first half of 2024, respectively, attributable to increased sales promotions as well as pressure from the new manufacturing plant that went live in the fourth quarter of 2023. Our segment contribution was also impacted by a 2.7 percentage point and 2.5 percentage point increase in selling expenses as a percent of revenue for the second quarter and first half of 2024, respectively, from increased transitional sales force incentives.

Southeast Asia/Pacific. The decline in revenue, Customers, Paid Affiliates and Sales Leaders for the second quarter and first half of 2024 is partially attributable to slowing momentum from the general macroeconomic factors in the markets along with price increases that we implemented in 2022 and 2023 to address inflation. During the second quarter of 2024, we began to see year-over-year improvements in many of our markets, but our Indonesia market remains challenging. Our revenue for the second quarter and first half of 2024 was negatively impacted 5% and 4%, respectively, by unfavorable foreign currency fluctuations. Our Paid Affiliates were negatively impacted by a change in eligibility requirements in our Pacific markets for receiving certain rewards within our compensation structure. We estimate the change in eligibility requirements resulted in a reduction of approximately one thousand Paid Affiliates for the three months ended June 30, 2024.

The year-over-year decrease in segment contribution is primarily attributable to the decline in revenue.

Japan. The decline in revenue is primarily attributable to an 11.3% and 10.8% negative impact from unfavorable foreign-currency fluctuations for the second quarter and first half of 2024, respectively. The increase in Sales Leaders is primarily from a modification we made to the compensation plan starting in the second quarter of 2023. Our Paid Affiliates were negatively impacted by a change in eligibility requirements for receiving certain rewards within our compensation structure. We estimate the change in eligibility requirements resulted in a reduction of approximately 14 thousand Paid Affiliates for the three months ended June 30, 2024.

The year-over-year decline in segment contribution reflects the decreased revenue, partially offset by a decline in general and administrative expenses attributable to savings from our restructuring plan.

South Korea. Our South Korea market was challenged by difficult macroeconomic trends, including inflationary pressures, and our associated price increases which negatively impacted our revenue, Customers, Paid Affiliates and Sales Leaders for the second quarter and first half of 2024.

The year-over-year decline in segment contribution for the second quarter of 2024 primarily reflects the decline in revenue, as well as a 2.0 percentage point increase in selling expenses, attributable to our recent incentive programs, partially offset a decrease in general and administrative expense. For the first half of 2024 the decline in segment contribution is primarily from the decline in revenue, as well as a 1.7 percentage point decline in gross margin, primarily from increased inventory write-offs in the first quarter associated with the decline in revenue.

Europe & Africa. The reduction in revenue, Customers, Paid Affiliates and Sales Leaders reflects the softening of momentum, as well as the macroeconomic factors that have led to a decline in the purchasing power of our customers for the second quarter and first half of 2024.

The year-over-year increase in segment contribution for the second quarter and first half of 2024 is primarily from declines in selling expenses for the second quarter, primarily from sales mix, as our products have differing commission percentages assigned to them and decline in general and administrative expenses from the restructuring efforts.

Hong Kong/Taiwan. The declines in our Hong Kong/Taiwan segment for the second quarter and first half of 2024 are attributable to macroeconomic issues, which are resulting in less purchasing power for our consumers. In addition, we experienced some pressures with the introduction of new technology in Taiwan. The increase in Paid Affiliates for the second quarter of 2024 is primarily attributable to recent incentive programs aimed at driving increased affiliates.

The decline in segment contribution was primarily driven by the decline in revenue, partially offset by savings recognized in general and administrative expenses from our previous restructuring activities.

Manufacturing. Our Manufacturing segment revenue increased 13.0% and 25.2% for the second quarter and first half of 2024, respectively, primarily driven by our Wasatch Manufacturing entity. During the second quarter of 2024 and first half of 2024, Wasatch revenue increased 29.6% and 47.1%, respectively, primarily from onboarding new customers and continued automation efforts to increase efficiencies and capacity.

The decrease in segment contribution for the second quarter is primarily from the decline in revenue at some of our manufacturing entities. The increase in segment contribution for the first half of 2024 is primarily from the increased revenue.

Rhyz Other. The increase in revenue of our Rhyz other segment is partially driven by 146.8% and 115.4% growth at our Mavely entity, for the second quarter and first half of 2024.

The decline in segment contribution is primarily from the companies we acquired in the second quarter of 2023, which we are continuing to invest in to enable future growth, as well as the impacts of purchase accounting, which resulted in $0.8 million and $2.1 million of incremental amortization of intangible assets for the second quarter and first half of 2024. This was partially offset by improving profitability at our Mavely entity.

Consolidated Results

Revenue

Revenue for the three-month period ended June 30, 2024 decreased 12% to $439.1 million, compared to $500.3 million in the prior-year period. Revenue for the six-month period ended June 30, 2024 decreased 13% to $0.9 billion compared to $1.0 billion. Our reported revenue was negatively impacted 4.2% and 4.0% from foreign-currency fluctuations for the three- and six-month periods ended June 30, 2024, respectively. For a discussion and analysis of these decreases in revenue, see “Overview” and “Segment Results,” above.

Gross profit

Gross profit as a percentage of revenue was 70.0% for the second quarter of 2024, compared to 72.9% for the prior-year period, and 70.2% for the first six months of 2024, compared to 72.6% for the prior-year period. Gross profit as a percentage of revenue for our core Nu Skin segments decreased 1.1 percentage points to 76.1% for the second quarter of 2024 and decreased 0.3 percentage points to 76.5% for the first six months of 2024. The second quarter of 2024 decline in our core Nu Skin segments gross margin is primarily attributable to sales promotions in our Americas and Mainland China segments during the quarter. Our gross margin for the three- and six-month periods ended June 30, 2024, was also impacted by the gross margin of our owned manufacturing entities, which as previously disclosed, is significantly lower than the gross margin of our core Nu Skin business. With the year-over-year growth within our Manufacturing segment, their revenue represented a higher proportion of our overall consolidated revenue for the three- and six-month periods ended June 30, 2023 than in the prior-year periods.

Selling expenses

Selling expenses as a percentage of revenue increased to 37.7% for the second quarter of 2024, compared to 37.0% for the prior year period, and decreased to 37.3% for the first six months of 2024, compared to 38.0% for the prior-year period. Core Nu Skin segments selling expenses as a percentage of revenue increased 2.0 percentage points to 42.2% for the second quarter of 2024 and increased 1.0 percentage points to 42.0% for the first six months of 2024. Selling expenses for our core Nu Skin business are driven by the specific performance of our individual Sales Leaders. Given the size of our sales force and the various components of our compensation and incentive programs, selling expenses as a percentage of revenue typically fluctuate plus or minus approximately 100 basis points from period to period. The increases in our selling expenses for the second quarter and first six months of 2024 also reflect changing market revenue mix and increased sales incentives. In the third quarter of 2024, we are holding our global Nu Skin L!VE event with an east L!VE in South Korea and a west L!VE in the United States. As a result of the global L!VE events we are anticipating an increase in selling expense as a percentage of revenue for the third quarter of 2024.

General and administrative expenses

General and administrative expenses decreased to $117.9 million in the second quarter of 2024, compared to $137.0 million in the prior-year period and decreased to $242.5 million in the first six months of 2024, compared to $270.9 million in the prior-year period. The $19.1 million decrease for the second quarter of 2024 and $28.4 million decrease for the first six months of 2024 was primarily from contraction in labor expense and occupancy related expenses, both attributable to our ongoing restructuring efforts in which we reduced our physical footprint and reduced our headcount. General and administrative expenses as a percentage of revenue decreased to 26.9% for the second quarter of 2024, from 27.4% for the prior-year period, and increased to 28.3% for the first six months of 2024, from 27.6% for the prior-year period.

Restructuring and impairment expenses

In the third quarter of 2022, we adopted a strategic plan to focus resources on our strategic priorities and optimize future growth and profitability. The global program included workforce reductions and footprint optimization. Total charges incurred under the program were approximately $53.3 million, with $40.8 million in cash charges of severance and lease termination cost and approximately $12.5 million of non-cash charges of impairment of fixed assets, acceleration of depreciation and impairment of other intangibles related to our footprint optimization. During the fourth quarter of 2022, we incurred charges to be settled in cash of $20.1 million in severance charges, $7.4 million in lease termination cost, and $5.2 million in other associated cost, and non-cash charges of $8.2 million in fixed asset impairments, $0.9 million in accelerated depreciation and $1.7 million in impairment of other intangibles. During the first quarter of 2023, we incurred charges to be settled in cash of $4.0 million in severance charges, $1.9 million in lease termination cost, and $2.2 million in other associated cost, and non-cash charges of $1.7 million in accelerated depreciation.

In the fourth quarter of 2023, we adopted another strategic plan to focus resources on our global priorities and optimize future growth and profitability. The global program includes workforce reductions. We estimate total charges under the program will approximate $20.0 million in cash charges of severance, approximately $2.2 million in other cash charges and approximately $8.2 million in non-cash charges, including approximately $6.4 million in fixed asset impairments. We expect to substantially complete the program during the second half of 2024. The program may expand as we continue to evaluate our business, including our product portfolio, global processes and organization, and operational footprint. During the fourth quarter of 2023, we incurred charges to be settled in cash of $10.0 million in severance charges. During the first quarter of 2024, we incurred charges to be settled in cash of $4.1 million in severance charges and $2.0 million in other associated cost, and non-cash charges of $1.0 million in write-down of assets. During the second quarter of 2024, we incurred charges to be settled in cash of $1.0 million in severance charges and $0.1 million on other cash charges, and non-cash charges of $7.2 million in write-down of assets.

During the three months ended June 30, 2024, we determined that the continued decline in our stock price and corresponding market capitalization as well as declines in some of our reporting units’ forecasts were triggering events that required us to perform a quantitative impairment analysis. When we performed an impairment test during the second quarter of 2024, we concluded that the estimated fair value of Americas, Mainland China, Southeast Asia/Pacific, Japan, South Korea, Europe & Africa, Hong Kong/Taiwan and our BeautyBio reporting units were less than their carrying value of equity as June 30, 2024. As a result, we recorded a non-cash goodwill impairment charge of $130.9 million in the second quarter of 2024.

In addition, during the three months ended June 30, 2024, we determined that the current operating losses and decline in forecasted losses associated with our BeautyBio retail asset group were an interim triggering event that required us to perform an interim impairment analysis on our BeautyBio retail asset group. We assessed the recoverability of the related asset group comparing the carrying value of the asset group to the undiscounted cash flows expected to be generated. The recoverability test indicated the retail asset group was impaired. We concluded the carrying value of the retail asset group exceeded the estimated fair value which resulted in an impairment charge of $10.1 million in our Rhyz other segment.

Interest expense

Interest expense increased to $6.7 million in the second quarter of 2024, compared to $5.8 million in the prior-year period. and $14.0 million for the first six months of 2024 compared to $10.7 million for the prior-year period. The increases in interest expense were primarily due to an increase in borrowings on our revolving credit facility.

Other income (expense), net

Other income (expense), net was $0.6 million for the second quarter of 2024 compared to $0.4 million for the prior-year period and $0.2 million for the first six months of 2024 compared to $3.8 million for the prior-year period. The decrease in other expense for the six-month period ended June 30, 2024 expense is primarily from the impact of foreign currency fluctuations on the valuation of our intercompany receivables/payables.

Provision for income taxes

Provision (benefit) for income taxes for the three- and six-month periods ended June 30, 2024 was $(13.4) million and $(11.8) million, respectively, compared to $10.2 million and $13.4 million for the prior-year periods. The effective tax rates for the three- and six-month periods ended June 30, 2024 were 10.2% and 9.0% of pre-tax income compared, respectively, to 27.5% and 26.0% in the prior-year periods. The decrease in effective tax rate for the second quarter and first six months of 2024 primarily reflects the impact of the second quarter of 2024 goodwill impairment.

Net income (loss)

As a result of the foregoing factors, net income (loss) for the second quarter of 2024 was $(118.3) million, compared to $26.9 million in the prior-year period. Net income (loss) for the first six months of 2024 was $(118.8) million, compared to $38.3 million for the first six months of 2023.

Liquidity and Capital Resources

Historically, our principal uses of cash have included operating expenses (particularly selling expenses) and working capital (principally inventory purchases), as well as capital expenditures, stock repurchases, dividends, and debt repayment. We have at times incurred long-term debt, or drawn on our revolving line of credit, to fund strategic transactions, stock repurchases, capital investments and short-term operating needs. We typically generate positive cash flow from operations due to favorable margins and have generally relied on cash from operations to fund operating activities. In the first six months of 2024, we generated $54.5 million in cash from operations, compared to $13.4 million during the prior-year period. The increase in cash flow from operations primarily reflects less inventory purchases compared to the first half of 2023, as we work to right size our balance sheet following the decline in revenue, partially offset by an increase in cash expenditures for the second quarter of 2024. Cash and cash equivalents, including current investments, as of June 30, 2024 and December 31, 2023 were $232.9 million and $267.8 million, respectively, with the decrease being driven by our quarterly debt payments, $30.0 million paid on our revolving credit facility and capital expenditures, as discussed below, partially offset by $54.5 million in cash from operations.

Working capital. As of June 30, 2024, working capital was $345.8 million, compared to $373.0 million as of December 31, 2023. Our decline in working capital is primarily attributable to the decline in cash as discussed above and a lower inventory balance partially offset by an increase in prepaid expenses primarily associated with corporate income tax payments.

Capital expenditures. Capital expenditures for the six months ended June 30, 2024 were $20.4 million. We expect that our capital expenditures in 2024 will be primarily related to:

• Rhyz plant expansion to increase capacity and capabilities;
• purchases and expenditures for computer systems and equipment, software, and application development; and
• the expansion and upgrade of facilities in our various markets.

We estimate that capital expenditures for the uses listed above will total approximately $40–60 million for 2024.

Credit Agreement. On June 14, 2022, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with various financial institutions as lenders and Bank of America, N.A., as administrative agent. The Credit Agreement provides for a $400.0 million term loan facility and a $500.0 million revolving credit facility, each with a term of five years. We used the proceeds of the term loan and the draw on the revolving facility to pay off the previous credit agreement. Both facilities bear interest at the SOFR, plus a margin based on our consolidated leverage ratio. The term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 2.5% during the first year and 5.0% during the subsequent years after the closing date of the Credit Agreement, with the remainder payable at final maturity. As of June 30, 2024 and December 31, 2023, we had $90.0 million and $120.0 million of outstanding borrowings under our revolving credit facility, and $370.0 million and $385.0 million on our term loan facility. The carrying value of the debt also reflects debt issuance costs of $1.7 million and $2.0 million as of June 30, 2024 and December 31, 2023, respectively, related to the Credit Agreement. The Credit Agreement requires us 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 June 30, 2024, we were in compliance with all debt covenants under the Credit Agreement.

Derivative Instruments. As of June 30, 2024, we had four interest rate swaps, with a total notional principal amount of $200 million and a maturity date of July 31, 2025. We entered into these interest rate swap arrangements during the third quarter of 2020 to hedge the variable cash flows associated with our variable-rate debt under the Credit Agreement.

Stock repurchase plan. In 2018, our board of directors approved a stock repurchase plan authorizing us to repurchase up to $500.0 million of our outstanding shares of Class A common stock on the open market or in private transactions. During the second quarter of 2024 and 2023 we repurchased no shares of our Class A common stock under the plan. As of June 30, 2024, $162.4 million was available for repurchases under the plan. Our stock repurchases are used primarily to offset dilution from our equity incentive plans and for strategic initiatives.

Dividends. In February and May 2024, our board of directors declared quarterly cash dividends of $0.06 per share. The quarterly cash dividends of $3.0 and $3.0 million were paid on March 6, 2024 and June 12, 2024 to stockholders of record on February 26, 2024 and May 31, 2024. In August 2024, our board of directors declared a quarterly cash dividend of $0.06 per share to be paid on September 11, 2024 to stockholders of record on August 30, 2024. Currently, we anticipate that our board of directors will continue to declare quarterly cash dividends and that the cash flows from operations will be sufficient to fund our future dividend payments. However, the continued declaration of dividends is subject to the discretion of our board of directors and will depend upon various factors, including our net earnings, financial condition, cash requirements, future prospects and other relevant factors.

Cash from foreign subsidiaries. As of June 30, 2024 and December 31, 2023, we held $232.9 million and $267.8 million, respectively, in cash and cash equivalents, including current investments. These amounts include $170.1 million and $213.7 million as of June 30, 2024 and December 31, 2023, respectively, held in our operations outside of the U.S. Substantially all of our non-U.S. cash and cash equivalents are readily convertible into U.S. dollars or other currencies, subject to procedural or other requirements in certain markets, as well as an indefinite-reinvestment designation, as described below.

We typically fund the cash requirements of our operations in the U.S. through intercompany dividends, intercompany loans and intercompany charges for products, use of intangible property, and corporate services. However, some markets impose government-approval or other requirements for the repatriation of dividends. For example, in Mainland China, we are unable to repatriate cash from current operations in the form of dividends until we file the necessary statutory financial statements for the relevant period. As of June 30, 2024, we had $26.9 million in cash denominated in Chinese RMB. We also have experienced delays in repatriating cash from Argentina. As of June 30, 2024 and December 31, 2023, we had $18.6 million and $17.7 million, respectively, in intercompany receivables with our Argentina subsidiary. We also have intercompany loan arrangements in some of our markets, including Mainland China, that allow us to access available cash, subject to certain limits in Mainland China and other jurisdictions. We also have drawn on our revolving line of credit to address cash needs until we can repatriate cash from Mainland China or other markets, and we may continue to do so. Except for $60.0 million of earnings in Mainland China that we designated as indefinitely reinvested during the second quarter of 2018, we currently plan to repatriate undistributed earnings from our non-U.S. operations as necessary, considering the cash needs of our non-U.S. operations and the cash needs of our U.S. operations for dividends, stock repurchases, capital investments, debt repayment and strategic transactions. Repatriation of non-U.S. earnings is subject to withholding taxes in certain foreign jurisdictions. Accordingly, we have accrued the necessary withholding taxes related to the non-U.S. earnings.

We currently believe that existing cash balances, future cash flows from operations and existing lines of credit will be adequate to fund our cash needs on both a short- and long-term basis. The majority of our historical expenses have been variable in nature, and as such, a potential reduction in the level of revenue would reduce our cash flow needs. In the event that our current cash balances, future cash flow from operations and current lines of credit are not sufficient to meet our obligations or strategic needs, we would consider raising additional funds in the debt or equity markets or restructuring our current debt obligations. Additionally, we would consider realigning our strategic plans, including a reduction in capital spending, stock repurchases or dividend payments.

Contingent Liabilities

Please refer to Note 11 to the consolidated financial statements contained in this Quarterly Report for information regarding our contingent liabilities.

Critical Accounting Policies and Estimates

The following critical accounting policies and estimates should be read in conjunction with our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the 2023 fiscal year.

Intangible Assets. Acquired intangible assets may represent indefinite-lived assets, determinable-lived intangibles or goodwill. Of these, only the costs of determinable-lived intangibles are amortized to expense over their estimated life. The value of indefinite-lived intangible assets and residual goodwill is not amortized, but is tested at least annually for impairment. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangibles. We test goodwill for impairment, at least annually, by reviewing the book value compared to the fair value at the reportable unit level. We have the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If under the quantitative assessment the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured. We elected to perform the quantitative assessment for fiscal year 2022 and we used the qualitative assessment for fiscal years 2023 and 2021.

Considerable management judgment and assumptions are used in our goodwill impairment assessment, including with respect to the estimated future cash flows, the earnings multiples used in the market approach, the discount rate used to discount such estimated future cash flows to their net present value and the reasonableness of the implied control premium relative to our market capitalization. These factors could materially increase or decrease the fair value of our reporting units and, accordingly, could result in a related impairment charge. Declines in our market capitalization or in our business performance could also result in a material impairment charge in a future period.

During the three months ended March 31, 2024, we determined that the recent decline in our stock price and corresponding market capitalization was a triggering event that required us to perform a quantitative impairment analysis. Based on the analysis, we 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 the reporting units exceeded the carrying value by approximately 1% - 7%.

During the three months ended June 30, 2024, we determined that the continued decline in our stock price and corresponding decrease in market capitalization as well as declines in some of our reporting units’ forecasts were triggering events that required us to perform a quantitative impairment analysis. Based on the analysis, we concluded that the estimated fair value of Americas, Mainland China, Southeast Asia/Pacific, Japan, South Korea, Europe & Africa, Hong Kong/Taiwan and our BeautyBio reporting units were less than their carrying value of equity as June 30, 2024. As a result, we recorded a non-cash goodwill impairment charge of $130.9 million in the second quarter of 2024.

Our revenue and profitability forecasts used in the goodwill impairment assessments considered recent and historical performance, strategic initiatives, industry trends and macroeconomic factors. Assumptions used in the valuations were similar to those that would be used by market participants performing independent valuations of the business.

Key assumptions developed by management and used in the quantitative analyses:

• Financial projections and future cash flows, including a base year that considered recent actual results lower than previous internal forecasts, with revenue growth and profitability improvement throughout the forecast period that reflects the long-term strategy for the business, and terminal growth rates based on the expected long-term growth rate of the business; and
• Market-based discount rates.

Our BeautyBio reporting unit remains sensitive to future increases in discount rates and changes in our forecast. We performed a sensitivity analysis on the impairment model used to test the manufacturing and Rhyz other reporting units’ goodwill. In doing so, we determined that individual changes of a 5% reduction in our annual earnings before interest and tax, or a 40 basis point increase in the discount rate used in the discounted cash flow models did not cause the estimated fair values of the reporting units to decline below their carrying value. We made our estimates based on information available as of the date of our assessment, using assumptions we believe market participants would use in performing an independent valuation of the business. Although we believe the estimates and assumptions used in the impairment testing are reasonable and appropriate, it is possible that the assumptions and conclusions regarding impairment or recoverability of our reporting units’ goodwill could change in future periods. There can be no assurance the estimates and assumptions, particularly our long-term financial projections, used in our goodwill impairment testing will prove to be accurate predictions of the future, if, for example, (i) the business does not perform as projected, (ii) overall economic conditions in the remainder of Fiscal 2024 or future years vary from current assumptions (including changes in discount rates and foreign currency exchange rates), (iii) business conditions or strategies change from current assumptions, (iv) investors require higher rates of return on equity investments in the marketplace, or (v) enterprise values of comparable publicly traded companies, or actual sales transactions of comparable companies, were to decline, resulting in lower multiples of revenues and profitability. A future impairment charge to our reporting units’ goodwill could have a material effect on the consolidated financial position and results of operations.

Seasonality and Cyclicality

In addition to general economic factors, we are impacted by seasonal factors and trends such as major cultural events and vacation patterns. For example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a negative impact on that quarter. We believe that direct selling is also generally negatively impacted during the third quarter, when many individuals, including our sales force, traditionally take vacations.

Prior to making a product generally available for purchase in a market, we often do one or more introductory offerings of the product, such as a preview of the product to our Sales Leaders or other product introduction or promotion. These offerings sometimes generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue, Sales Leaders, Paid Affiliates and/or Customers during the quarter and can skew year-over-year and sequential comparisons.

Non-GAAP Financial Measures

Constant-currency revenue change is a non-GAAP financial measure that removes the impact of fluctuations in foreign-currency exchange rates, thereby facilitating period-to-period comparisons of the Company’s performance. It is calculated by translating the current period’s revenue at the same average exchange rates in effect during the applicable prior-year period and then comparing that amount to the prior-year period’s revenue. We believe that constant-currency revenue change is useful to investors, lenders and analysts because such information enables them to gauge the impact of foreign-currency fluctuations on our revenue from period to period.

Available Information

Our website address is www.nuskin.com (http://www.nuskin.com). We make available, free of charge on our Investor Relations website, ir.nuskin.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

We also use our Investor Relations website, ir.nuskin.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, Securities and Exchange Commission filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.

Currency Risk and Exchange Rate Information

A majority of our revenue and many of our expenses are recognized outside of the United States, except for inventory purchases, a significant portion of which are primarily transacted in U.S. dollars from vendors in the United States. The local currency of each of our Subsidiaries’ primary markets is considered the functional currency with the exception of our Asia product-distribution subsidiary in Singapore and, as discussed below, our subsidiary in Argentina. All revenue and expenses are translated at weighted-average exchange rates for the periods reported. Therefore, our reported revenue and earnings will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. These impacts may be significant because a large portion of our business is derived from outside of the United States. Given the uncertainty of exchange rate fluctuations, it is difficult to predict the effect of these fluctuations on our future business, product pricing and results of operations or financial condition.

In the second quarter of 2018, published inflation indices indicated that the three-year cumulative inflation in Argentina exceeded 100 percent, and as of July 1, 2018, we elected to adopt highly inflationary accounting for our subsidiary in Argentina. Under highly inflationary accounting, the functional currency for our subsidiary in Argentina became the U.S. dollar, and the income statement and balance sheet for this subsidiary have been measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on peso-denominated monetary assets and liabilities has been reflected in earnings in Other income (expense), net and was not material. As of June 30, 2024, our subsidiary in Argentina had a small net peso monetary position. Net sales of our subsidiary in Argentina were less than 2% of our consolidated net sales for the three- and six-month periods ended June 30, 2024 and 2023.

We may seek to reduce our exposure to fluctuations in foreign currency exchange rates through the use of foreign currency exchange contracts and through intercompany loans of foreign currency. We do not use derivative financial instruments for trading or speculative purposes. We regularly monitor our foreign currency risks and periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results. As of June 30, 2024 and 2023, we did not hold material non-designated mark-to-market forward derivative contracts to hedge foreign denominated intercompany positions or third party foreign debt. As of June 30, 2024, and 2023 we did not hold any material forward contracts designated as foreign currency cash flow hedges. We continue to evaluate our foreign currency hedging policy.

For additional information about our market risk see Note 9 to the consolidated financial statements contained in this Quarterly Report.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of June 30, 2024.

Changes in Internal Controls Over Financial Reporting.

We made no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the 2023 fiscal year.