Nu Skin(NUS) - 2019 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Nu Skin Enterprises, Inc., including the balance sheets, income statements, comprehensive income statements, stockholders' equity statements, and cash flow statements, along with detailed notes explaining significant accounting policies, financial instruments, segment performance, and other relevant financial disclosures Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time Consolidated Balance Sheet Highlights (U.S. dollars in thousands): | Item | September 30, 2019 | December 31, 2018 | | :-------------------------------- | :------------------- | :------------------ | | ASSETS | | | | Total current assets | $739,129 | $799,237 | | Property and equipment, net | $447,653 | $464,535 | | Right-of-use assets | $115,557 | — | | Goodwill | $196,573 | $196,573 | | Total assets | $1,736,905 | $1,694,446 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | $368,407 | $439,655 | | Operating lease liabilities | $80,953 | — | | Long-term debt | $341,724 | $361,008 | | Total liabilities | $891,105 | $912,579 | | Total stockholders' equity | $845,800 | $781,867 | | Total liabilities and stockholders' equity | $1,736,905 | $1,694,446 | - Total assets increased by $42.46 million from December 31, 2018, to September 30, 2019, primarily due to the recognition of right-of-use assets totaling $115.56 million upon adoption of the new lease accounting standard[6] - Total current liabilities decreased by $71.25 million, mainly driven by a reduction in the current portion of long-term debt from $69.46 million to $25.00 million[6] Consolidated Statements of Income This section details the company's financial performance over specific periods, presenting revenue, gross profit, operating income, and net income Consolidated Statements of Income Highlights (U.S. dollars in thousands, except per share amounts): | Item | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue | $589,934 | $675,312 | $1,837,057 | $1,995,721 | | Gross profit | $449,772 | $517,855 | $1,396,203 | $1,523,434 | | Operating income | $69,892 | $80,675 | $212,747 | $222,429 | | Net income | $44,090 | $53,146 | $133,441 | $139,646 | | Basic net income per share | $0.79 | $0.96 | $2.40 | $2.54 | | Diluted net income per share | $0.79 | $0.94 | $2.39 | $2.47 | - Revenue decreased by 13% for the three months ended September 30, 2019, and by 8% for the nine months ended September 30, 2019, compared to the prior-year periods[8] - Net income per diluted share decreased by 16% for the three-month period and by 3% for the nine-month period year-over-year[8] Consolidated Statements of Comprehensive Income This section presents the company's comprehensive income, including net income and other comprehensive income or loss components, primarily from foreign currency translation adjustments Consolidated Statements of Comprehensive Income Highlights (U.S. dollars in thousands): | Item | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $44,090 | $53,146 | $133,441 | $139,646 | | Other comprehensive income (loss), net of tax | $(13,685) | $(7,095) | $(15,027) | $(16,237) | | Comprehensive income | $30,405 | $46,051 | $118,414 | $123,409 | - Other comprehensive loss, primarily due to foreign currency translation adjustments, increased significantly for the three-month period ended September 30, 2019, to $(13.68) million from $(7.10) million in the prior year[10] Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity, reflecting net income, dividends, stock repurchases, and other comprehensive income adjustments Changes in Stockholders' Equity (U.S. dollars in thousands): | Item | Balance at July 1, 2019 | Net Income | Other Comprehensive Income, net of tax | Stock-based Compensation | Cash Dividends | Balance at September 30, 2019 | | :-------------------------------- | :---------------------- | :--------- | :------------------------------------- | :----------------------- | :------------- | :---------------------------- | | Total Stockholders' Equity | $834,950 | $44,090 | $(13,685) | $1,015 | $(20,552) | $845,800 | | Item | Balance at January 1, 2019 | Cumulative Effect Adjustment (ASC Topic 842) | Net Income | Other Comprehensive Income, net of tax | Repurchase of Class A Common Stock | Stock-based Compensation | Cash Dividends | Balance at September 30, 2019 | | :-------------------------------- | :----------------------- | :----------------------------------- | :--------- | :------------------------------------- | :--------------------------------- | :----------------------- | :------------- | :---------------------------- | | Total Stockholders' Equity | $781,867 | $657 | $133,441 | $(15,027) | $(825) | $9,649 | $(61,636) | $845,800 | - Total stockholders' equity increased from $781.87 million at January 1, 2019, to $845.80 million at September 30, 2019, driven by net income and stock-based compensation, partially offset by cash dividends and other comprehensive loss[14] - The adoption of ASC Topic 842 resulted in a cumulative effect adjustment of $0.66 million increase to beginning retained earnings as of January 1, 2019[14][18] Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows Highlights (U.S. dollars in thousands): | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $128,028 | $113,850 | | Net cash used in investing activities | $(58,129) | $(75,238) | | Net cash used in financing activities | $(129,242) | $(58,810) | | Net increase (decrease) in cash and cash equivalents | $(66,877) | $(36,333) | | Cash and cash equivalents, end of period | $320,034 | $390,066 | - Net cash provided by operating activities increased by $14.18 million, primarily due to improvements in inventory management and cost-saving initiatives[15][126] - Net cash used in financing activities significantly increased to $(129.24) million in 2019 from $(58.81) million in 2018, mainly due to higher debt payments and lower proceeds from debt[15] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements Note 1. The Company Nu Skin Enterprises, Inc. is a global direct selling company specializing in personal care products and nutritional supplements under the Nu Skin and Pharmanex brands. The company operates through nine segments, including seven geographic Nu Skin segments, a Manufacturing segment, and a Grow Tech segment, which focuses on sustainable ingredient sourcing and other industry applications - Nu Skin operates as a holding company with Nu Skin as its primary operating unit, focusing on premium personal care products and nutritional supplements[16] - The company reports revenue from nine segments: Mainland China, South Korea, Southeast Asia, Americas/Pacific, Japan, Hong Kong/Taiwan, EMEA, Manufacturing, and Grow Tech[16] - The Manufacturing segment includes subsidiaries acquired in Q1 2018, while the Grow Tech segment focuses on sourcing sustainable ingredients and developing applications for other industries[16] Note 2. Summary of Significant Accounting Policies This note outlines the company's significant accounting policies, including the adoption of new accounting standards for leases (ASC Topic 842) and goodwill impairment (ASU 2017-04), inventory valuation, revenue recognition principles under ASC Topic 606, and accounting for contract liabilities related to customer loyalty programs Accounting Pronouncements This subsection details the adoption of new accounting standards, including those for leases, goodwill impairment, and hedging activities, and their financial impact - The company adopted ASU 2016-02, Leases (Topic 842), effective January 1, 2019, using the modified retrospective transition method, resulting in a $0.7 million increase to beginning retained earnings and recognition of right-of-use assets and lease liabilities[18] - ASU 2017-04, Simplifying the Test for Goodwill Impairment, was early adopted effective January 1, 2019, with no material impact on financial statements[19] - ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, was effective January 1, 2019, and did not have a material impact[20] Inventory This subsection provides a breakdown of the company's inventory, including raw materials and finished goods, and highlights changes over time Inventory, Net (U.S. dollars in thousands): | Item | September 30, 2019 | December 31, 2018 | | :----------------- | :------------------- | :------------------ | | Raw materials | $89,026 | $91,610 | | Finished goods | $193,971 | $204,211 | | Total Inventory, net | $282,997 | $295,821 | - Total inventory, net, decreased by $12.82 million from December 31, 2018, to September 30, 2019, primarily due to a reduction in finished goods[23] Revenue Recognition This subsection explains the company's principles for recognizing revenue from customer contracts and accounting for loyalty programs - The company adopted ASC Topic 606, "Revenue from Contracts with Customers," on January 1, 2018, resulting in a net reduction to opening retained earnings of $13.0 million, primarily related to loyalty point program deferrals[24][25] - Revenue is recognized when performance obligations are satisfied by transferring promised products to the customer, typically at the shipping point[26] - Contract liabilities for customer loyalty programs, recorded as deferred revenue, were $12.7 million as of September 30, 2019, down from $13.8 million at December 31, 2018[27][28] Leases This subsection details the accounting treatment for operating leases, including the recognition of right-of-use assets and lease liabilities on the balance sheet - Operating leases are recognized on the balance sheet as right-of-use (ROU) assets and lease liabilities, measured at the present value of lease payments over the lease term[32][33] - The company accounts for lease and non-lease components as a single lease component[34] Note 3. Goodwill Goodwill is allocated to the company's reportable segments, which include geographic Nu Skin segments, Manufacturing, and Grow Tech. The total goodwill remained unchanged at $196.57 million from December 31, 2018, to September 30, 2019 Goodwill by Reportable Segment (U.S. dollars in thousands): | Segment | September 30, 2019 | December 31, 2018 | | :----------------- | :------------------- | :------------------ | | Mainland China | $32,179 | $32,179 | | Americas/Pacific | $9,449 | $9,449 | | South Korea | $29,261 | $29,261 | | Southeast Asia | $18,537 | $18,537 | | Japan | $16,019 | $16,019 | | Hong Kong/Taiwan | $6,634 | $6,634 | | EMEA | $2,875 | $2,875 | | Manufacturing | $72,469 | $72,469 | | Grow Tech | $9,150 | $9,150 | | Total | $196,573 | $196,573 | - The company reorganized its segment structure in Q1 2019 to separately disclose Manufacturing and Grow Tech segments, which were previously part of the 'Other' category[35] Note 4. Debt This note details the company's debt facilities, including a $400 million term loan and a $350 million revolving credit facility under the 2018 Credit Agreement. It also covers the conversion and extinguishment of $210 million convertible senior notes in Q1 2018, which resulted in a $7.2 million loss on extinguishment of debt - The company entered into a new Credit Agreement in April 2018, providing a $400 million term loan and a $350 million revolving credit facility, with interest rates tied to LIBOR plus 2.25%[38] - As of September 30, 2019, the term loan facility balance was $370.0 million, and the revolving credit facility had a zero balance, down from $49.5 million at December 31, 2018[44] - The $210.0 million convertible senior notes issued in 2016 were converted in Q1 2018, leading to the issuance of 1,535,652 shares of Class A common stock and a cash payment of $213.4 million, and a $7.2 million loss on extinguishment of debt[40][43] Note 5. Leases This note provides detailed information on the company's operating leases, including lease terms, discount rates, and lease expenses. As of September 30, 2019, the company recognized $115.6 million in operating right-of-use assets and $118.2 million in total principal lease liabilities - As of September 30, 2019, the weighted average remaining lease term for operating leases was 4.0 years, and the weighted average discount rate was 4.8%[46] Lease Expense (U.S. dollars in thousands): | Item | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :------------------ | :------------------------------ | :----------------------------- | | Operating lease cost | $12,399 | $37,677 | | Short-term lease cost | $41 | $145 | | Variable lease cost | $732 | $2,889 | | Total | $13,172 | $40,711 | Maturities of Lease Liabilities (U.S. dollars in thousands): | Year Ending December 31, | Operating Leases | | :----------------------- | :--------------- | | 2019 | $12,801 | | 2020 | $39,764 | | 2021 | $32,965 | | 2022 | $18,419 | | 2023 | $11,387 | | Thereafter | $15,721 | | Total | $131,057 | | Less: Finance charges | $12,860 | | Total principal liability | $118,197 | Note 6. Capital Stock This note details the company's capital stock activities, including net income per share calculations, quarterly cash dividends, and common stock repurchases. The company declared quarterly cash dividends of $0.37 per share and repurchased a minimal number of shares in 2019 Net income per share This subsection presents the company's basic and diluted net income per share calculations and factors affecting them - Basic net income per share was $0.79 for Q3 2019 and $2.40 for the nine months ended September 30, 2019[8] - Diluted net income per share was $0.79 for Q3 2019 and $2.39 for the nine months ended September 30, 2019[8] - Stock options of 1.3 million (Q3 2019) and 1.2 million (YTD 2019) were excluded from diluted EPS calculation as they were anti-dilutive[52] Dividends This subsection details the company's quarterly cash dividend declarations and payment schedules - The board of directors declared quarterly cash dividends of $0.37 per share in February, April, and August 2019, totaling approximately $20.5 million to $20.6 million each[53] - A quarterly cash dividend of $0.37 per share was also declared in November 2019, payable on December 11, 2019[53] Repurchase of common stock This subsection outlines the company's common stock repurchase activities and the remaining authorization under its stock repurchase plan - During the nine months ended September 30, 2019, the company repurchased 14,000 shares of Class A common stock for $0.8 million[54] - As of September 30, 2019, $470.2 million remained available under the company's stock repurchase plan[54] Note 7. Fair Value This note outlines the fair value hierarchy for financial instruments, categorizing them into Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs). The company measures certain financial assets, including cash equivalents and life insurance contracts, at fair value on a recurring basis Fair Value Hierarchy of Financial Assets (U.S. dollars in thousands): | Item | Level 1 | Level 2 | Level 3 | Total (Sep 30, 2019) | | :--------------------------------- | :------ | :------ | :------ | :------------------- | | Cash equivalents and current investments | $84,500 | $— | $— | $84,500 | | Other long-term assets | $3,748 | $— | $— | $3,748 | | Life insurance contracts | $— | $— | $39,644 | $39,644 | | Total | $88,248 | $— | $39,644 | $127,892 | | Item | Level 1 | Level 2 | Level 3 | Total (Dec 31, 2018) | | :--------------------------------- | :------ | :------ | :------ | :------------------- | | Cash equivalents and current investments | $35,260 | $— | $— | $35,260 | | Other long-term assets | $3,568 | $— | $— | $3,568 | | Life insurance contracts | $— | $— | $35,590 | $35,590 | | Total | $38,828 | $— | $35,590 | $74,418 | - Total financial assets measured at fair value increased from $74.42 million at December 31, 2018, to $127.89 million at September 30, 2019, primarily driven by an increase in Level 1 cash equivalents and current investments[57] Note 8. Income Taxes The company's provision for income taxes increased for both the three- and nine-month periods ended September 30, 2019, with effective tax rates of 32.1% and 33.8% respectively. This note also discusses deferred tax assets, indefinitely reinvested foreign earnings, and ongoing tax examinations Provision for Income Taxes (U.S. dollars in thousands): | Period | Provision for Income Taxes | Effective Tax Rate | | :--------------------------------- | :------------------------- | :----------------- | | Three Months Ended Sep 30, 2019 | $20,823 | 32.1% | | Three Months Ended Sep 30, 2018 | $20,547 | 27.9% | | Nine Months Ended Sep 30, 2019 | $68,153 | 33.8% | | Nine Months Ended Sep 30, 2018 | $65,843 | 32.0% | - The increase in effective tax rates for 2019 compared to 2018 is primarily due to the release of a valuation allowance in Q3 2018 and the decision to designate $60.0 million of Mainland China earnings as permanently reinvested in Q2 2018[124] - The company had net deferred tax assets of $19.3 million as of September 30, 2019, and expects gross unrecognized tax benefits to increase by approximately $0.5 million to $1.5 million in the next 12 months[61][63] Note 9. Derivative Financial Instruments The company uses non-designated foreign currency derivatives to hedge intercompany transactions and mitigate foreign currency fluctuations, though no gains or losses were recognized from these in 2019. It also designates foreign currency forward contracts as cash-flow hedges for forecasted intercompany transactions, with no such contracts held as of September 30, 2019 - The company did not have any gains or losses related to derivative instruments not designated as hedging instruments for the three- and nine-month periods ended September 30, 2019 and 2018[65] - As of September 30, 2019 and 2018, the company held no foreign currency forward contracts designated as cash-flow hedges[67] - The accumulated other comprehensive loss of $95.0 million (Sep 30, 2019) and $79.9 million (Dec 31, 2018) is primarily related to cumulative translation adjustments[69] Note 10. Segment Information This note provides detailed financial information by segment, including revenue, segment contribution, depreciation and amortization, and capital expenditures. The company reorganized its segments in Q1 2019 to separately disclose Manufacturing and Grow Tech, which were previously part of 'Other' Revenue by Segment This subsection provides a detailed breakdown of the company's revenue generated by each operating segment over various periods Revenue by Segment (U.S. dollars in thousands): | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Mainland China | $173,974 | $226,645 | $567,795 | $669,432 | | Americas/Pacific | $83,635 | $93,580 | $262,932 | $289,859 | | South Korea | $79,435 | $89,963 | $248,020 | $270,517 | | Southeast Asia | $78,963 | $86,307 | $226,853 | $236,390 | | Japan | $67,197 | $63,649 | $194,557 | $190,986 | | Hong Kong/Taiwan | $40,449 | $44,949 | $124,719 | $138,147 | | EMEA | $35,742 | $42,819 | $120,960 | $131,810 | | Manufacturing | $30,601 | $26,022 | $91,430 | $65,937 | | Grow Tech | $— | $— | $30 | $— | | Total | $589,934 | $675,312 | $1,837,057 | $1,995,721 | - Mainland China revenue decreased by 23% (21% constant currency) for the three-month period and 15% (11% constant currency) for the nine-month period, primarily due to sales meeting restrictions and lack of major product launches[98][95] - Manufacturing segment revenue increased by 18% for the three-month period and 39% for the nine-month period, reflecting increased capacity and external sales[98][116] Segment Contribution This subsection presents the financial contribution of each operating segment, reflecting their profitability before corporate allocations Segment Contribution (U.S. dollars in thousands): | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Mainland China | $48,619 | $71,185 | $158,873 | $189,901 | | Americas/Pacific | $12,875 | $11,848 | $41,314 | $38,088 | | South Korea | $24,770 | $24,754 | $76,417 | $75,836 | | Southeast Asia | $22,063 | $21,204 | $60,895 | $58,245 | | Japan | $16,287 | $15,162 | $46,216 | $41,777 | | Hong Kong/Taiwan | $8,063 | $8,100 | $24,754 | $23,781 | | EMEA | $1,529 | $2,614 | $6,114 | $10,438 | | Manufacturing | $4,577 | $2,045 | $11,598 | $4,039 | | Grow Tech | $(5,822) | $(2,732) | $(14,033) | $(6,049) | | Total segment contribution | $132,961 | $154,180 | $412,148 | $436,056 | | Corporate and other | $(63,069) | $(73,505) | $(199,401) | $(213,627) | | Operating income | $69,892 | $80,675 | $212,747 | $222,429 | - Mainland China's segment contribution decreased by 32% for the three-month period and 16% for the nine-month period, primarily due to lower revenue[100][104] - Manufacturing segment contribution increased by 124% for the three-month period and 187% for the nine-month period, driven by revenue increases and improved gross margin[101][117] - Grow Tech segment reported increased losses, reflecting ongoing research and development investments[101][118] Depreciation and Amortization This subsection details the depreciation and amortization expenses allocated across the company's various operating segments Depreciation and Amortization by Segment (U.S. dollars in thousands): | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total Nu Skin | $6,223 | $6,697 | $20,259 | $21,297 | | Manufacturing | $1,711 | $2,950 | $4,916 | $8,596 | | Grow Tech | $1,244 | $652 | $3,064 | $1,098 | | Corporate and other | $10,127 | $12,392 | $29,725 | $31,842 | | Total | $19,305 | $22,691 | $57,964 | $62,833 | - Total depreciation and amortization decreased for both the three-month and nine-month periods ended September 30, 2019, compared to the prior year[79][80] Capital Expenditures This subsection outlines the capital expenditures made by each operating segment for property, equipment, and strategic initiatives Capital Expenditures by Segment (U.S. dollars in thousands): | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Mainland China | $10,614 | $2,117 | $13,328 | $5,015 | | Total Nu Skin | $12,445 | $3,336 | $19,052 | $7,960 | | Manufacturing | $1,100 | $1,100 | $4,281 | $2,568 | | Grow Tech | $2,577 | $3,127 | $7,628 | $11,449 | | Corporate and other | $7,448 | $6,301 | $21,823 | $20,316 | | Total | $23,570 | $13,864 | $52,784 | $42,293 | - Total capital expenditures increased to $52.78 million for the nine months ended September 30, 2019, from $42.29 million in the prior-year period, with a significant increase in Mainland China[82] Note 11. Commitments and Contingencies The company is subject to various government regulations, legal proceedings, and tax audits. Management believes that the ultimate liability from these claims and contingencies will not materially adversely affect the company's financial condition, results of operations, or cash flows - The company is subject to government regulations regarding product formulation, labeling, claims, advertising, and its direct selling system[83] - Regular audits by tax authorities may result in additional tax liabilities, but the company believes it has appropriately provided for income taxes[84] Note 12. Acquisitions In Q1 2018, the company completed three acquisitions: Innuvate Health Sciences, LLC (nutritional product manufacturer), Treviso, LLC (liquid contract manufacturing), and L&W Holdings, Inc. (packaging supplier). These acquisitions resulted in a total goodwill of $72.5 million - On January 22, 2018, Nu Skin acquired the remaining 73% ownership in Innuvate Health Sciences, LLC for $23.5 million in cash and shares[85] - On February 12, 2018, Nu Skin acquired the remaining 65% ownership in Treviso, LLC for $83.9 million in cash and shares, making it a wholly-owned subsidiary[86] - On February 12, 2018, Nu Skin acquired 100% ownership in L&W Holdings, Inc. for $25.0 million in shares[87] - These acquisitions resulted in goodwill allocations of $17.2 million for Innuvate, $42.5 million for Treviso, and $12.8 million for L&W[88] Note 13. Restructuring In Q4 2018, the company initiated a strategic restructuring plan, primarily impacting information technology and corporate/Americas offices. This resulted in a $48.6 million non-cash charge for asset impairment and $22.1 million in cash charges for severance and other related costs - A non-cash charge of $48.6 million was recorded for impairment of information technology assets, including internally developed software[90] - Cash charges of $22.1 million were incurred, including $20.1 million for employee severance[90] - There was no restructuring activity for the three months ended September 30, 2019[91] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results for the third quarter and first nine months of 2019. It covers revenue declines, segment-specific challenges and improvements, consolidated financial metrics, liquidity, capital resources, and key accounting policies, highlighting the impact of foreign currency fluctuations and regulatory scrutiny in Mainland China Overview This section provides a high-level summary of the company's financial performance, including revenue, sales leaders, customers, and diluted EPS trends - Revenue decreased 13% to $589.9 million for Q3 2019 and 8% to $1.8 billion for the first nine months of 2019, compared to prior-year periods[94] - Sales Leaders decreased 16% year-over-year, while Customers increased 4%[94] - Revenue declines were attributed to continued restrictions on sales meetings in Mainland China, lack of a major product launch in 2019, and negative foreign-currency impacts of 2% (Q3) and 4% (YTD)[95] - Diluted EPS decreased 16% to $0.79 for Q3 2019 and 3% to $2.39 for the first nine months of 2019[96] Segment Results This section analyzes the financial performance of each operating segment, highlighting revenue, customer, and sales leader trends, along with segment contribution Customers and Sales Leaders as of September 30: | Segment | 2019 Customers | 2019 Sales Leaders | 2018 Customers | 2018 Sales Leaders | % Change Customers | % Change Sales Leaders | | :----------------- | :------------- | :----------------- | :------------- | :----------------- | :----------------- | :--------------------- | | Mainland China | 317,257 | 23,776 | 210,212 | 33,335 | 51% | (29)% | | Americas/Pacific | 229,013 | 7,760 | 276,923 | 8,475 | (17)% | (8)% | | South Korea | 169,589 | 7,363 | 180,254 | 7,700 | (6)% | (4)% | | Southeast Asia | 145,845 | 7,936 | 146,586 | 8,668 | (1)% | (8)% | | Japan | 128,373 | 5,964 | 130,831 | 6,182 | (2)% | (4)% | | Hong Kong/Taiwan | 68,862 | 4,231 | 75,985 | 4,402 | (9)% | (4)% | | EMEA | 147,758 | 4,060 | 144,977 | 4,320 | 2% | (6)% | | Total | 1,206,697 | 61,090 | 1,165,768 | 73,082 | 4% | (16)% | Mainland China This subsection details the financial performance of the Mainland China segment, focusing on revenue, customer growth, and the impact of regulatory scrutiny - Revenue decreased year-over-year due to continued restrictions on sales meetings and negative media scrutiny impacting consumer sentiment and Sales Leader attraction[103] - Customers increased by 51% year-over-year, driven by customer initiatives during Q3 2019[102][103] - Segment contribution declined due to lower revenue, partially offset by decreased general and administrative expenses from cost-saving initiatives and limited sales force events[104] Americas/Pacific This subsection analyzes the financial performance of the Americas/Pacific segment, including revenue, sales leaders, and the impact of foreign currency fluctuations - Revenue, Sales Leaders, and Customers decreased, significantly impacted by hyperinflation in Argentina, which accounted for over $5.0 million (Q3) and $19.1 million (YTD) of the decline[105] - Foreign-currency fluctuations negatively impacted revenue by 4% (Q3) and 6% (YTD), primarily due to the weakening Argentine peso[105] - Segment contribution increased due to effective cost-saving measures and a decrease in selling expenses as a percentage of revenue, despite lower revenue[106] South Korea This subsection details the financial performance of the South Korea segment, including revenue, sales leaders, and the impact of competitive pressures and foreign currency - Revenue, Sales Leaders, and Customers decreased, reflecting competitive pressures and a negative 6% impact from foreign-currency fluctuations[107] - Segment contribution remained flat due to decreased general and administrative expenses and lower selling expenses as a percentage of revenue, offsetting the revenue decline[108] Southeast Asia This subsection analyzes the financial performance of the Southeast Asia segment, highlighting revenue, sales leaders, and the impact of regulatory changes and prior-year comparisons - Revenue and Sales Leaders declined due to a tough prior-year comparison (significant distributor event) and changes in Vietnam regulations that lengthened the distributor process[109] - The revenue decline was offset by improvements in gross margin from favorable sales mix and reductions in general and administrative expenses[110] Japan This subsection details the financial performance of the Japan segment, focusing on constant-currency revenue growth and improvements in segment contribution - Constant-currency revenue grew 2% in Q3 2019 and 1% for the first nine months, indicating market stabilization, despite soft Sales Leader and Customer numbers[111] - Segment contribution increased due to improved revenue, higher gross margin, and successful general and administrative cost-saving measures[112] Hong Kong/Taiwan This subsection analyzes the financial performance of the Hong Kong/Taiwan segment, including revenue, customer trends, and the impact of social incidents - Revenue and Customers declined, primarily due to a strong prior-year period (Greater China sales force event) and business disruptions from social incidents in Hong Kong[113] - Segment contribution remained flat in Q3 2019 due to improved gross margin from product mix and reduced general and administrative expenses, despite lower revenue[114] EMEA This subsection details the financial performance of the EMEA segment, focusing on revenue and sales leader declines due to market scrutiny and program adjustments - Revenue and Sales Leaders declined due to negative media scrutiny in the UK market and a longer-than-anticipated adjustment period for Sales Leaders with the Velocity program[115] - Segment contribution decreased primarily from the revenue decline and an increase in selling expenses as a percentage of revenue[115] Manufacturing This subsection analyzes the financial performance of the Manufacturing segment, highlighting revenue growth and improved segment contribution from increased capacity - Revenue increased 18% (Q3) and 39% (YTD) year-over-year, driven by previous investments in additional capacity[116] - Segment contribution improved by $2.5 million (Q3) and $7.6 million (YTD) due to revenue increases and improved gross margin[117] Grow Tech This subsection details the strategic focus and financial performance of the Grow Tech segment, including its long-term goals and expected losses from R&D investments - The Grow Tech segment focuses on long-term strategy for sourcing pure, effective, and sustainable ingredients[118] - The segment is expected to continue incurring losses in 2019 due to ongoing research and refinement of technology[118] Consolidated Results This section provides a consolidated view of the company's financial performance, analyzing key metrics such as revenue, gross profit, and net income Revenue This subsection details the consolidated revenue trends for the company over specific periods - Consolidated revenue decreased 13% to $589.9 million in Q3 2019 and 8% to $1.8 billion for the first nine months of 2019[119] Gross profit This subsection analyzes the company's consolidated gross profit and gross margin, identifying factors influencing changes - Gross profit as a percentage of revenue was 76.2% for Q3 2019 (down from 76.7%) and 76.0% for the first nine months of 2019 (down from 76.3%)[120] - The decrease in consolidated gross margin was attributed to increased revenue from the lower-margin Manufacturing segment and lower revenue from the core Nu Skin business[120] Selling expenses This subsection details the company's consolidated selling expenses and their percentage of revenue, noting contributing factors - Selling expenses as a percentage of revenue were 39.3% for Q3 2019 (down from 40.2%) and 39.6% for the first nine months of 2019 (down from 40.2%)[121] - The increase in Manufacturing segment revenue, which has low selling expenses, contributed to lowering consolidated selling expenses as a percentage of revenue[121] General and administrative expenses This subsection analyzes the company's consolidated general and administrative expenses, highlighting reductions from labor and event cost savings - General and administrative expenses decreased to $147.9 million in Q3 2019 and $456.0 million for the first nine months of 2019[122] - The decrease was primarily due to a $19.3 million reduction in labor expenses (Q3) and $35.0 million (YTD) from decreased employee headcount and lower employee incentive compensation[122] - Expenses related to sales force events decreased $10.4 million for the first nine months due to limited sales meetings in Mainland China[122] Other income (expense), net This subsection details the company's other income and expenses, net, including foreign currency impacts and non-cash charges/gains - Other income (expense), net, improved to $(5.0) million in Q3 2019 and $(11.2) million for the first nine months of 2019[123] - The improvement primarily reflects decreased foreign-currency translation losses of $2.0 million (Q3) and $10.8 million (YTD)[123] - The nine-month improvement also reflects a $7.2 million non-cash charge from convertible note conversion in Q1 2018, offset by a $13.6 million non-cash gain on step acquisitions in Q1 2018[123] Provision for income taxes This subsection presents the company's provision for income taxes and effective tax rates, explaining factors for period-over-period changes - Provision for income taxes was $20.8 million for Q3 2019 and $68.2 million for the first nine months of 2019[124] - Effective tax rates were 32.1% for Q3 2019 and 33.8% for the first nine months of 2019, higher than prior-year periods due to valuation allowance release and permanently reinvested earnings designation in 2018[124] Net income This subsection details the company's consolidated net income for the reported periods - Net income for Q3 2019 was $44.1 million, down from $53.1 million in the prior year[125] - Net income for the first nine months of 2019 was $133.4 million, down from $139.6 million in the prior year[125] Liquidity and Capital Resources This section discusses the company's financial liquidity and capital management, including cash flows, working capital, debt, and shareholder return programs - Cash from operations increased to $128.0 million for the first nine months of 2019, up from $113.9 million in the prior-year period, driven by inventory management and cost savings[126] - Cash and cash equivalents, including current investments, decreased to $327.5 million as of September 30, 2019, from $398.3 million at December 31, 2018[126] Working capital This subsection analyzes changes in the company's working capital, identifying key drivers such as prepaid expenses and debt reductions - Working capital increased to $370.7 million as of September 30, 2019, from $359.6 million at December 31, 2018[127] - The increase was primarily due to increased prepaid expenses for the global Nu Skin LIVE! event, decreased accruals from severance payouts, and a reduction in the revolving line of credit, partially offset by a lower cash balance[127] Capital expenditures This subsection details the company's capital expenditures for facility expansions, systems, and strategic initiatives, along with future projections - Capital expenditures for the first nine months of 2019 totaled $52.8 million, including facility expansions, computer systems, and Grow Tech initiatives[128] - Estimated capital expenditures for 2019 are $65-70 million, with an additional $55-60 million projected over the next two to three years for a new manufacturing plant in Mainland China, of which $10 million was spent by Sep 30, 2019[129] Conversion and satisfaction of convertible notes This subsection describes the conversion and settlement of the company's convertible senior notes, including stock issuance and cash payments - The $210.0 million convertible senior notes were converted in Q1 2018, leading to the issuance of Class A common stock and a cash payment of $213.4 million in April 2018[130] Credit Agreement This subsection details the company's credit facilities, including term loans and revolving credit, and compliance with debt covenants - The company entered into a Credit Agreement in April 2018, providing a $400.0 million term loan and a $350.0 million revolving credit facility[131] - Proceeds from the new debt were used to pay off the previous credit agreement and the outstanding convertible notes[131] - The company was in compliance with all debt covenants as of September 30, 2019[132] Modification of Previous Credit Agreement This subsection details the repayment of outstanding debt under the company's previous credit agreement - The outstanding debt of $257.6 million under the Previous Credit Agreement was repaid in April 2018[134] Stock repurchase plan This subsection outlines the company's stock repurchase program, including shares repurchased and remaining authorization - The board approved a $500.0 million stock repurchase plan in 2018[135] - Approximately 14,000 shares were repurchased for $0.8 million during the first nine months of 2019[135] - $470.2 million remained available for repurchases as of September 30, 2019[135] Dividends This subsection details the company's quarterly cash dividend policy and funding sources - Quarterly cash dividends of $0.37 per share were declared and paid in March, June, and September 2019[136] - The company anticipates continuing quarterly cash dividends, funded by cash flows from operations[136] Cash from foreign subsidiaries This subsection discusses the company's cash holdings in non-U.S. operations and plans for repatriation of earnings - As of September 30, 2019, $223.5 million of cash and cash equivalents were held in non-U.S. operations[137] - The company plans to repatriate undistributed earnings from non-U.S. operations as needed, except for $60.0 million of Mainland China earnings designated as indefinitely reinvested[138] Contingent Liabilities This subsection refers to information on the company's contingent liabilities, including government regulations, legal proceedings, and tax audits - The company refers to Note 11 for information regarding contingent liabilities, which include government regulations, legal proceedings, and tax audits[140][83][84] Critical Accounting Policies This section confirms that there were no significant changes to the company's critical accounting policies during the reporting period - There were no significant changes in critical accounting policies during the third quarter of 2019[140] Seasonality and Cyclicality This section discusses how seasonal factors and product offerings impact the company's business performance and comparisons - The company's business is impacted by seasonal factors, such as local New Year celebrations in Asian markets (negative impact in Q1) and vacation patterns (negative impact in Q3)[141] - Introductory product offerings or promotions can generate significant activity and skew year-over-year and sequential comparisons[142] Currency Risk and Exchange Rate Information This section details the company's exposure to foreign currency fluctuations and its strategies for mitigating currency risk - A majority of revenue and expenses are recognized outside the U.S., making reported revenue and earnings sensitive to U.S. dollar fluctuations[143] - The company adopted highly inflationary accounting for its Argentina subsidiary as of July 1, 2018, due to cumulative inflation exceeding 100 percent[144] - The company may use foreign currency exchange contracts and intercompany loans to reduce exposure to foreign currency fluctuations, but held no designated or non-designated forward contracts as of September 30, 2019[145] Non-GAAP Financial Measures This section defines and explains the use of non-GAAP financial measures, such as constant-currency revenue change, for performance analysis - Constant-currency revenue change is a non-GAAP measure used to remove the impact of foreign-currency fluctuations for period-to-period performance comparisons[146] Available Information This section informs stakeholders about where to access the company's SEC filings and other material information - The company makes its SEC filings and other material information available free of charge on its Investor Relations website (ir.nuskin.com)[147][148] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section incorporates by reference the discussion on currency risk and exchange rate information from Item 2 and Note 9, detailing the company's exposure to market risks, primarily foreign currency fluctuations - Information on market risk, particularly currency risk and exchange rate fluctuations, is incorporated from Item 2 and Note 9 of the consolidated financial statements[150] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of September 30, 2019, based on evaluation by the CEO and CFO, and states that no material changes were made to internal controls over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures This subsection details the evaluation of the company's disclosure controls and procedures - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[151] Changes in Internal Controls Over Financial Reporting This subsection reports on any changes in the company's internal controls over financial reporting - No material changes were made to internal control over financial reporting during the fiscal quarter ended September 30, 2019[152] Part II. Other Information Item 1. Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, but no specific material details are provided in this section - The company is involved in legal proceedings arising in the ordinary course of business[154] Item 1A. Risk Factors This section highlights significant risks, particularly those related to the company's operations in Mainland China, including intense government scrutiny and the potential for regulatory changes or enforcement actions. It also addresses challenges to the network marketing system and the implications of recent FTC settlements with other direct selling companies Mainland China Operations and Regulatory Scrutiny This subsection details the significant government scrutiny and regulatory risks faced by the company's operations in Mainland China - Operations in Mainland China are subject to significant government scrutiny, with broad latitude for investigations and varying interpretations of regulations[155][156] - Increased regulatory scrutiny and negative media coverage in 2019, initially due to competitor claims, have led to more government reviews, inspections, and consumer complaints[156] - Non-compliance could result in substantial fines, business interruptions, and termination of licenses[156] Direct Selling Regulations in Mainland China This subsection outlines the specific direct selling and anti-pyramiding regulations in Mainland China and the risks associated with their interpretation and enforcement - Mainland China's direct selling and anti-pyramiding regulations prohibit multi-level compensation and overseas personnel participation, requiring a distinct business model[159] - Regulators have broad discretion to interpret and enforce regulations, posing a risk of changes to the company's business model or imposition of penalties[160][162] - A 100-day campaign in January 2019 to review health products and direct selling industries has led to heightened scrutiny and uncertainty regarding future regulatory changes[163] Challenges to Network Marketing System This subsection discusses the regulatory and legal challenges to the company's network marketing system, including the impact of FTC settlements and potential business model changes - The company faces challenges from government regulators and private parties regarding its network marketing system, as laws are fact-based and subject to interpretation[164][170] - Recent FTC settlements with other direct selling companies have created ambiguity regarding appropriate earnings/lifestyle claims and the focus on consumers, potentially leading to new industry standards or enforcement actions[165][166][168] - Adverse rulings, legal actions, or negative publicity could impact the business, potentially requiring changes to the global sales compensation plan or restricting operations[168][170] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that the company did not repurchase any shares of its Class A common stock during the three months ended September 30, 2019, under its publicly announced stock repurchase plan Purchases of Equity Securities by the Issuer (July 1 - Sep 30, 2019): | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs (in millions) | | :-------------------- | :----------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------- | | July 1 - 31, 2019 | — | — | — | $470.2 | | August 1 - 31, 2019 | — | — | — | $470.2 | | September 1 - 30, 2019 | — | — | — | $470.2 | | Total | — | — | — | | - As of September 30, 2019, $470.2 million remained available for repurchases under the company's $500 million stock repurchase plan[171] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[172] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[172] Item 5. Other Information No other information was reported under this item - No other information was reported[172] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO under the Sarbanes-Oxley Act and Inline XBRL documents - Exhibits include certifications by the CEO and CFO (Rule 13a-14(a) and Section 1350) and various Inline XBRL documents[172] Signature This section provides the official signature and date of filing for the financial report - The report was signed by Mark H. Lawrence, Chief Financial Officer, on November 5, 2019[173]