Nu Skin(NUS) - 2019 Q4 - Annual Report

Part I ITEM 1. BUSINESS Nu Skin develops and distributes beauty and wellness solutions globally through a direct selling model, with 2019 revenue of $2.4 billion, largely from international markets - In 2019, the company generated $2.4 billion in revenue, with 87% originating from outside the United States. Mainland China was the largest market, contributing approximately 30% of total revenue[10][12] - The company operates through a direct selling channel, using person-to-person marketing. It also has a strategic investment arm, Rhyz Inc., which includes manufacturing companies that generated $122.0 million in external revenue in 2019[10][11] Products The company's product portfolio, including personal care and wellness, is driven by ageLOC anti-aging products, with manufacturing split between third-party and in-house facilities Revenue by Product Category (2017-2019) | Product Category | 2019 Revenue (millions) | 2019 % | 2018 Revenue (millions) | 2018 % | 2017 Revenue (millions) | 2017 % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Personal Care | $1,423.5 | 58.8% | $1,659.7 | 62.0% | $1,456.4 | 63.9% | | Wellness | $863.1 | 35.7% | $921.3 | 34.4% | $817.2 | 35.9% | | Other | $133.8 | 5.5% | $98.0 | 3.6% | $5.5 | 0.2% | | Total | $2,420.4 | 100.0% | $2,679.0 | 100.0% | $2,279.1 | 100.0% | - ageLOC branded products are a significant revenue driver, with ageLOC personal care products accounting for 30% of total revenue and ageLOC nutritional products accounting for 17% of total revenue in 2019[19][20] - The company utilizes a combination of in-house R&D, collaborations with universities, and technology acquisitions to develop innovative products. Key acquisitions include Pharmanex and LifeGen Technologies[22][23][24] - Most products for markets outside Mainland China are sourced from third-party suppliers. In Mainland China, the company operates its own manufacturing facilities to produce the majority of products sold locally[26] Distribution Channel Nu Skin uses a direct selling model with distinct customer and sales leader groups, while Mainland China operates a unique retail and sales employee model due to regulatory restrictions Total Customers and Sales Leaders by Region (as of Dec 31) | Region | 2019 Customers | 2019 Sales Leaders | 2018 Customers | 2018 Sales Leaders | 2017 Customers | 2017 Sales Leaders | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Mainland China | 292,812 | 17,987 | 303,789 | 33,129 | 192,604 | 40,610 | | Americas/Pacific | 220,216 | 7,607 | 248,609 | 8,354 | 244,467 | 8,871 | | South Korea | 168,972 | 7,251 | 182,026 | 7,565 | 172,553 | 8,431 | | Southeast Asia | 136,349 | 7,480 | 153,465 | 8,933 | 121,764 | 8,020 | | Japan | 125,557 | 5,916 | 130,181 | 5,916 | 132,041 | 6,592 | | EMEA | 153,330 | 4,619 | 149,085 | 4,791 | 135,051 | 4,683 | | Hong Kong/Taiwan | 65,669 | 3,900 | 76,891 | 4,767 | 71,091 | 4,671 | | Total | 1,162,905 | 54,760 | 1,244,046 | 73,455 | 1,069,571 | 81,878 | - The 'Velocity' sales compensation program, introduced starting in Q4 2017, was designed to increase Sales Leader productivity but has impacted the total number of individuals qualifying for 'Sales Leader' status due to adjusted requirements[37] - In Mainland China, a unique business model is used due to a prohibition on multi-level compensation. This model involves sales employees, independent direct sellers, and independent marketers compensated through retail bonuses and service fees[43][44][45] Geographic Regions The company operates across seven geographic segments, with Mainland China being the largest in 2019, contributing 30% of total revenue Revenue by Segment (2017-2019) | Segment | 2019 Revenue (millions) | 2019 % | 2018 Revenue (millions) | 2018 % | 2017 Revenue (millions) | 2017 % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Mainland China | $722.5 | 30% | $886.5 | 33% | $717.0 | 32% | | Americas/Pacific | $349.1 | 14% | $385.0 | 14% | $342.4 | 15% | | South Korea | $330.0 | 14% | $373.4 | 14% | $361.7 | 16% | | Southeast Asia | $301.6 | 12% | $316.9 | 12% | $268.6 | 12% | | Japan | $260.0 | 11% | $254.9 | 10% | $256.1 | 11% | | EMEA | $167.2 | 7% | $182.4 | 7% | $160.3 | 7% | | Hong Kong/ Taiwan | $166.3 | 7% | $185.9 | 7% | $166.7 | 7% | | Manufacturing | $121.9 | 5% | $90.6 | 3% | — | — | | Other/Grow Tech | $1.8 | — | $3.4 | — | $6.3 | — | | Total | $2,420.4 | 100% | $2,679.0 | 100% | $2,279.1 | 100% | Regulation The company's direct selling and product activities face extensive global regulations, particularly in Mainland China, with oversight from agencies like the FDA and FTC - Direct selling is regulated globally to prevent fraudulent schemes. Laws often govern product returns, sales compensation limits, and mandate that compensation is for product sales, not recruitment[56] - Mainland China's regulatory environment is complex, prohibiting multi-level compensation and subjecting the company to significant government and media scrutiny. In 2019, heightened government reviews and inspections limited business meetings[57][58] - Several markets, including Mainland China and South Korea, impose limits on sales commissions. For example, South Korea limits sales compensation to 35% of the total value of goods supplied[59] - Products are subject to extensive regulation. In the U.S., the FDA regulates cosmetics, OTC drugs, and dietary supplements under the Dietary Supplement Health and Education Act (DSHEA), which governs labeling and claims[63][64][71] - Advertising and product claims are regulated by the FTC in the U.S., which requires scientific substantiation. The company has a consent decree with the FTC from the early 1990s regarding distributor claims[83][85] Competition Nu Skin competes with global and local direct selling companies, as well as traditional marketers of personal care and nutritional products, based on product innovation and business opportunity - The company competes with other global direct selling companies such as Amway, Avon, and Herbalife, as well as local competitors in markets like Mainland China[89] - In the product space, competition comes from a broad array of marketers of personal care and nutritional products, including pharmaceutical companies, many with greater financial resources and name recognition[90] Employees As of December 31, 2019, the company had approximately 4,900 global employees, excluding 20,000 sales employees in Mainland China - As of December 31, 2019, Nu Skin had approximately 4,900 full- and part-time employees worldwide, in addition to approximately 20,000 sales employees in Mainland China[91] Information About Our Executive Officers This section lists the company's executive officers as of January 31, 2020, including key figures like Steven J. Lund (Executive Chairman) and Ritch N. Wood (CEO) Executive Officers (as of Jan 31, 2020) | Name | Age | Position | | :--- | :--- | :--- | | Steven J. Lund | 66 | Executive Chairman of the Board | | Ritch N. Wood | 54 | Chief Executive Officer | | Ryan S. Napierski | 46 | President | | Mark H. Lawrence | 50 | Executive Vice President and Chief Financial Officer | | Joseph Y. Chang | 67 | Executive Vice President of Product Development and Chief Scientific Officer | | D. Matthew Dorny | 55 | Executive Vice President, General Counsel and Secretary | ITEM 1A. RISK FACTORS The company faces substantial risks from regulatory challenges, especially in Mainland China, adverse publicity, epidemics, foreign currency fluctuations, and high sales force turnover - The company faces risks from challenges to its network marketing system, citing recent FTC settlements with other direct selling companies that have created ambiguity about legal standards for the industry[103][104][105] - Operations in Mainland China are a significant risk due to intense government scrutiny. A 100-day government campaign in 2019 to inspect the health products industry led to meeting restrictions and negative media coverage[112][114][120] - Epidemics, such as the coronavirus outbreak, are identified as a major risk that could negatively impact business due to the person-to-person nature of direct selling, with a significant negative impact anticipated in Mainland China[121] - The company is exposed to foreign currency risk, as 87% of its 2019 sales occurred outside the U.S. A strengthening U.S. dollar negatively impacts reported revenue and profit[134] - High turnover in the sales force is a key risk. The ability to retain existing and recruit new sales force members is critical for revenue growth. Sales Leaders in Mainland China declined 46% from year-end 2018 to 2019[148][149] - The loss of key, high-level Sales Leaders could negatively impact growth and revenue, as a small number of top leaders drive a substantial portion of sales[151] ITEM 1B. UNRESOLVED STAFF COMMENTS The company reports no unresolved staff comments from the Securities and Exchange Commission - None ITEM 2. PROPERTIES The company's principal properties include corporate headquarters in Provo, Utah, and offices in Shanghai, China, along with various distribution, R&D, and manufacturing facilities - Principal properties include corporate headquarters in Provo, Utah; distribution centers in Provo and Mainland China; R&D centers in Provo and Shanghai; and manufacturing facilities in Mainland China and Utah[241][242] ITEM 3. LEGAL PROCEEDINGS The company is in litigation with a consultant seeking over $250 million in damages related to an indoor-growing business, which the company is vigorously defending - The company is in litigation with consultant Don Roberts, who claims partnership in the indoor-growing business and seeks over $250 million in damages. The company is contesting the claims[243] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Not applicable Part II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's Class A common stock trades on the NYSE under 'NUS', with a $500 million stock repurchase plan, and has underperformed the S&P 500 over five years - The company's Class A common stock is listed on the New York Stock Exchange under the trading symbol 'NUS'[246] - As of December 31, 2019, $470.2 million remained available for repurchase under the company's $500 million stock repurchase plan authorized in August 2018[247] 5-Year Cumulative Total Return Comparison | Date | Nu Skin | S&P 500 Index | S&P MidCap 400 Consumer Staples Index | | :--- | :--- | :--- | :--- | | Dec 31, 2014 | 100.00 | 100.00 | 100.00 | | Dec 31, 2015 | 89.49 | 101.38 | 96.43 | | Dec 31, 2016 | 116.69 | 113.51 | 109.04 | | Dec 31, 2017 | 170.99 | 138.29 | 112.62 | | Dec 31, 2018 | 156.76 | 132.23 | 104.57 | | Dec 31, 2019 | 108.15 | 173.86 | 115.91 | ITEM 6. SELECTED FINANCIAL DATA This section provides a five-year summary of the company's consolidated financial data from 2015 to 2019, including key income statement, balance sheet, and operating metrics Selected Financial Data (2015-2019) | (in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,420,416 | $2,679,008 | $2,279,099 | $2,207,797 | $2,247,047 | | Operating Income | $267,426 | $240,860 | $274,483 | $231,104 | $244,702 | | Net Income | $173,553 | $121,887 | $129,437 | $143,086 | $133,046 | | Diluted EPS | $3.10 | $2.16 | $2.36 | $2.55 | $2.25 | | Total Assets | $1,769,006 | $1,694,446 | $1,589,872 | $1,474,045 | $1,505,843 | | Stockholders' Equity | $875,289 | $781,867 | $704,596 | $664,070 | $825,621 | | Customers | 1,162,905 | 1,244,046 | 1,069,571 | 987,563 | 993,788 | | Sales Leaders | 54,760 | 73,455 | 81,878 | 61,627 | 67,575 | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In 2019, revenue decreased 10% to $2.42 billion due to Mainland China challenges, while EPS increased, and the company anticipates significant 2020 impact from the coronavirus outbreak Results of Operations In 2019, revenue decreased 10% to $2.42 billion, primarily due to an 18% decline in Mainland China, while net income increased due to lower 2018 restructuring charges - 2019 revenue decreased 10% to $2.42 billion, while Sales Leaders and Customers declined 25% and 7%, respectively. The decline was largely due to challenges in Mainland China and a 3% negative impact from foreign currency fluctuations[288][289] Revenue by Segment (2019 vs 2018) | Segment | 2019 Revenue (thousands) | 2018 Revenue (thousands) | % Change | Constant Currency % Change | | :--- | :--- | :--- | :--- | :--- | | Mainland China | $722,526 | $886,472 | (18)% | (15)% | | Americas/Pacific | $349,078 | $385,034 | (9)% | (4)% | | South Korea | $329,978 | $373,357 | (12)% | (6)% | | Southeast Asia | $301,620 | $316,890 | (5)% | (5)% | | Japan | $260,039 | $254,939 | 2% | 1% | | EMEA | $167,165 | $182,394 | (8)% | (3)% | | Hong Kong/ Taiwan | $166,335 | $185,893 | (11)% | (9)% | | Total Nu Skin | $2,298,362 | $2,588,402 | (11)% | (8)% | - In Q4 2018, the company recorded a $70.7 million restructuring and impairment charge, which included a $48.6 million non-cash impairment of IT assets and $22.1 million in cash charges for severance and other costs[320] - The company anticipates a significant negative impact on its business in Mainland China and other markets due to the coronavirus outbreak, related meeting restrictions, and travel quarantines[291] Liquidity and Capital Resources The company generated $177.9 million in cash from operations in 2019, maintaining $344.0 million in cash, and has a $400 million term loan and $350 million revolving credit facility - Cash provided by operating activities was $177.9 million in 2019, compared to $202.7 million in 2018[325] - As of December 31, 2019, cash and cash equivalents were $344.0 million, with $277.9 million held in operations outside the United States[326][334] - In April 2018, the company entered into a new Credit Agreement providing for a $400 million term loan and a $350 million revolving credit facility[330] - The company paid $82.2 million in dividends in 2019 ($1.48 per share) and approved an increase for 2020[333] Contractual Obligations as of December 31, 2019 | Obligation (in thousands) | Total | Due in 2020 | Due 2021-2022 | Due 2023-2024 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt obligations | $365,000 | $27,500 | $67,500 | $270,000 | $— | | Interest payable | $37,822 | $12,625 | $22,032 | $3,165 | $— | | Operating lease obligations | $170,502 | $45,942 | $62,367 | $30,825 | $31,368 | | Purchase obligations | $289,776 | $209,222 | $73,258 | $7,238 | $58 | | Other long-term liabilities | $96,795 | $4,098 | $7,155 | $6,573 | $78,969 | | Total | $959,895 | $299,387 | $232,312 | $317,801 | $110,395 | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents the company's audited consolidated financial statements for 2019, including balance sheets, income statements, cash flows, and accompanying notes and auditor's report Consolidated Income Statement (Year Ended Dec 31) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenue | $2,420,416 | $2,679,008 | $2,279,099 | | Gross Profit | $1,838,996 | $2,044,868 | $1,777,021 | | Operating Income | $267,426 | $240,860 | $274,483 | | Net Income | $173,553 | $121,887 | $129,437 | Consolidated Balance Sheet (As of Dec 31) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $335,630 | $386,911 | | Total Current Assets | $740,166 | $799,237 | | Total Assets | $1,769,006 | $1,694,446 | | Total Current Liabilities | $356,760 | $439,655 | | Long-term debt | $334,461 | $361,008 | | Total Liabilities | $893,717 | $912,579 | | Total Stockholders' Equity | $875,289 | $781,867 | Consolidated Statement of Cash Flows (Year Ended Dec 31) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $177,931 | $202,738 | $302,555 | | Net cash used in investing activities | ($71,412) | ($108,761) | ($91,964) | | Net cash used in financing activities | ($154,794) | ($116,714) | ($159,572) | | Net (decrease) increase in cash | ($51,281) | ($39,488) | $69,153 | - Subsequent to year-end, the company placed a temporary hold on in-person meetings in Mainland China due to the coronavirus outbreak and anticipates a significant short-term impact on financial results for 2020[516] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with an unqualified audit opinion from PricewaterhouseCoopers LLP - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[534] - Based on an assessment using the COSO framework, management concluded that internal control over financial reporting was effective as of December 31, 2019. This assessment was audited by PricewaterhouseCoopers LLP[537][538] Part III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information for this item, excluding executive officer details in Part I, will be incorporated by reference from the 2020 Definitive Proxy Statement - Information for this item will be incorporated by reference from the company's 2020 Definitive Proxy Statement, except for executive officer information already provided in Part I of this report[541] ITEM 11. EXECUTIVE COMPENSATION Information for this item will be incorporated by reference from the company's 2020 Definitive Proxy Statement - Information for this item will be incorporated by reference from the company's 2020 Definitive Proxy Statement[541] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information for this item will be incorporated by reference from the company's 2020 Definitive Proxy Statement - Information for this item will be incorporated by reference from the company's 2020 Definitive Proxy Statement[541] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information for this item will be incorporated by reference from the company's 2020 Definitive Proxy Statement - Information for this item will be incorporated by reference from the company's 2020 Definitive Proxy Statement[541] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information for this item will be incorporated by reference from the company's 2020 Definitive Proxy Statement - Information for this item will be incorporated by reference from the company's 2020 Definitive Proxy Statement[541] Part IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications - This section provides a list of all exhibits filed with the Form 10-K, including governance documents, material contracts, and certifications required by the Sarbanes-Oxley Act[542][543][544] ITEM 16. FORM 10-K SUMMARY The company reports that no Form 10-K summary is provided - None