Nu Skin(NUS) - 2020 Q4 - Annual Report

Part I Business Nu Skin is a global direct selling company developing and distributing beauty and wellness solutions across approximately 50 markets, primarily through direct selling - In 2020, the company's revenue was $2.6 billion, with 84% generated from outside the United States[9][11] - Mainland China is the largest market, accounting for approximately 24% of 2020 revenue[11] - The strategic investment arm, Rhyz Inc., generated $150.2 million (6% of total revenue) in 2020 from external sales, primarily from its manufacturing companies[10] Products The company offers personal care and wellness products under Nu Skin, Pharmanex, and ageLOC brands, emphasizing innovation and intellectual property protection Revenue by Product Category (2018-2020) | Product Category | 2020 Revenue (Millions) | 2020 % | 2019 Revenue (Millions) | 2019 % | 2018 Revenue (Millions) | 2018 % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Personal Care | $1,491.8 | 57.8% | $1,423.5 | 58.8% | $1,659.7 | 62.0% | | Wellness | $922.6 | 35.7% | $863.1 | 35.7% | $921.3 | 34.4% | | Other (Rhyz) | $167.5 | 6.5% | $133.8 | 5.5% | $98.0 | 3.6% | | Total | $2,581.9 | 100.0% | $2,420.4 | 100.0% | $2,679.0 | 100.0% | - ageLOC personal care products accounted for 50% of the personal care category revenue and 29% of total revenue in 2020[17] - ageLOC nutritional products accounted for 42% of the wellness category revenue and 15% of total revenue in 2020[18] - The company is launching a new beauty device system, ageLOC Boost, in the second half of 2020 and into 2021[12] Distribution Channel Nu Skin employs a direct selling channel, increasingly leveraging social commerce, with distinct models for customer and sales leader engagement, especially in Mainland China Total Customers and Sales Leaders by Region (as of year-end) | Region | Customers 2020 | Sales Leaders 2020 | Customers 2019 | Sales Leaders 2019 | Customers 2018 | Sales Leaders 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Mainland China | 381,460 | 21,990 | 292,812 | 17,987 | 303,789 | 33,129 | | Americas/Pacific | 404,955 | 14,439 | 220,216 | 7,607 | 248,609 | 8,354 | | South Korea | 158,953 | 7,059 | 168,972 | 7,251 | 182,026 | 7,565 | | Southeast Asia | 154,355 | 8,903 | 136,349 | 7,480 | 153,465 | 8,933 | | Japan | 128,400 | 6,318 | 125,557 | 5,916 | 130,181 | 5,916 | | EMEA | 258,587 | 7,063 | 153,330 | 4,619 | 149,085 | 4,791 | | Hong Kong/Taiwan | 70,592 | 4,663 | 65,669 | 3,900 | 76,891 | 4,767 | | Total | 1,557,302 | 70,435 | 1,162,905 | 54,760 | 1,244,046 | 73,455 | - The business model in Mainland China is different from other markets due to local regulations, utilizing retail stores, sales employees, independent direct sellers, and independent marketers[29][42] - Outside Mainland China, Brand Affiliates earn money through retail markups and sales compensation from their network's product sales (multi-level compensation)[39][40] Geographic Regions Operating in approximately 50 markets, the company's revenue is segmented geographically, with Mainland China being the largest contributor in 2020 Revenue by Segment (2018-2020) | Segment | 2020 Revenue (Millions) | 2020 % | 2019 Revenue (Millions) | 2019 % | 2018 Revenue (Millions) | 2018 % | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Mainland China | $625.5 | 24% | $722.5 | 30% | $886.5 | 33% | | Americas/Pacific | $511.9 | 20% | $349.1 | 14% | $385.0 | 14% | | South Korea | $326.5 | 13% | $330.0 | 14% | $373.4 | 14% | | Southeast Asia | $302.7 | 12% | $301.6 | 12% | $316.9 | 12% | | Japan | $273.7 | 10% | $260.0 | 11% | $254.9 | 10% | | EMEA | $230.2 | 9% | $167.2 | 7% | $182.4 | 7% | | Hong Kong/Taiwan | $161.1 | 6% | $166.3 | 7% | $185.9 | 7% | | Manufacturing | $149.3 | 6% | $121.9 | 5% | $90.6 | 3% | | Total | $2,581.9 | 100% | $2,420.4 | 100% | $2,679.0 | 100% | Regulation The company's direct selling model and products are subject to extensive global regulations, with particularly complex and restrictive frameworks in Mainland China - Direct selling regulations are intended to prevent pyramid schemes and generally require compensation to be based on product sales, not recruitment[54] - The regulatory environment in Mainland China is complex, prohibiting multi-level compensation and requiring a different business model, with no new direct selling licenses issued since early 2019[55] - Several markets, including Mainland China and South Korea, impose limits on the amount of sales compensation that can be paid (e.g., 30% of revenue in China, 35% of total value in South Korea)[58] - Products are regulated by agencies like the FDA, with cosmetics regulated for safety and labeling, and wellness products (dietary supplements) under DSHEA with specific rules for claims and new ingredients[61][71] - The FTC exercises jurisdiction over advertising in the U.S. and has taken action against companies for deceptive advertising and lack of substantiation for claims, with the company having a consent decree from the early 1990s regarding product and earnings claims[84][86] Competition Nu Skin faces intense competition in direct selling and product markets from established global companies with greater financial resources and brand recognition - Competes with other direct selling organizations such as Amway, Avon Products, and Herbalife to attract and retain its sales force and consumers[92] - Product competitors include a broad array of marketers of personal care and nutritional products like L'Oréal, Clinique, Estée Lauder, and Mary Kay[93] Human Capital Resources As of year-end 2020, Nu Skin employed approximately 5,000 globally and 21,000 in Mainland China, with a human capital strategy focused on business transformation and diversity - As of year-end 2020, the company had approximately 5,000 full- and part-time employees globally, and an additional 21,000 sales employees in Mainland China[94] - The human capital strategy focuses on three objectives: supporting business transformation, leveraging diversity and inclusion, and simplifying the employee experience[95] - Recognized by Direct Selling News as one of the best places to work in direct selling for the fifth consecutive year in 2020[98] Available Information The company provides free access to its SEC filings and other material information on its Investor Relations website - SEC filings are available free of charge on the company's Investor Relations website, ir.nuskin.com[100] Information About Our Executive Officers This section details executive officers as of January 2021, including a planned CEO transition for September 2021 - A CEO transition is planned for September 1, 2021, with current President Ryan S. Napierski set to succeed Ritch N. Wood as Chief Executive Officer[108] Risk Factors The company faces substantial risks from direct selling model challenges, intense Mainland China scrutiny, competition, and cybersecurity threats - Challenges to the network marketing system, particularly from the FTC regarding pyramid schemes and improper earnings claims, pose a significant risk[113][114][115] - Operations in Mainland China are subject to intense government scrutiny and complex regulations that prohibit multi-level compensation, creating significant business risk[138][143] - The business is dependent on its ability to recruit and retain its independent sales force, which is subject to high turnover[174] - The COVID-19 pandemic has negatively impacted the business by limiting in-person meetings, disrupting supply chains, and increasing regulatory scrutiny of health-related claims[161][163] - Cybersecurity risks and failure to protect customer and sales force data could lead to litigation, liability, and reputational harm, especially with evolving data privacy laws like GDPR[236][237] Unresolved Staff Comments The company reports no unresolved staff comments - None[242] Properties The company's principal properties include corporate headquarters, R&D centers, and manufacturing facilities primarily in Utah and Mainland China - Principal administrative offices are in Provo, Utah and Shanghai, China[244] - The company operates its own manufacturing facilities in Mainland China and, through its Rhyz arm, in Utah[246] Legal Proceedings The company is in ongoing litigation with Don Roberts over a claimed 50% ownership in its indoor-growing business, seeking over $250 million - The company is in litigation with Don Roberts, who claims a 50% ownership interest in the indoor-growing business and is seeking damages exceeding $250 million[247] Mine Safety Disclosures This item is not applicable to the company - Not applicable[248] Part II 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 325,479 shares repurchased for approximately $17 million in Q4 2020 Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining Under Plan (millions) | | :--- | :--- | :--- | :--- | | Oct 1 – 31, 2020 | 60,985 | $54.12 | $339.5 | | Nov 1 – 30, 2020 | 142,954 | $51.36 | $332.2 | | Dec 1 – 31, 2020 | 121,540 | $52.09 | $325.8 | | Total | 325,479 | $52.15 | $325.8 | - The company's Class A common stock is listed on the NYSE under the symbol 'NUS'[250] Reserved This item is not applicable Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, revenue grew 7% to $2.58 billion, driven by digital commerce and customer growth, despite a decline in Mainland China Results of Operations For 2020, revenue increased 7% to $2.58 billion, driven by Americas/Pacific and EMEA growth, offsetting a Mainland China decline, while gross margin decreased 2020 vs. 2019 Revenue Change by Segment | Segment | 2020 Revenue (millions) | 2019 Revenue (millions) | % Change | Constant Currency % Change | | :--- | :--- | :--- | :--- | :--- | | Mainland China | $625.5 | $722.5 | (13)% | (14)% | | Americas/Pacific | $511.9 | $349.1 | 47% | 53% | | South Korea | $326.5 | $330.0 | (1)% | — | | Southeast Asia | $302.7 | $301.6 | — | 1% | | Japan | $273.7 | $260.0 | 5% | 3% | | EMEA | $230.2 | $167.2 | 38% | 35% | | Hong Kong/Taiwan | $161.1 | $166.3 | (3)% | (6)% | | Total Nu Skin | $2,431.7 | $2,298.4 | 6% | 6% | - Overall revenue increased 7% to $2.58 billion in 2020 from $2.42 billion in 2019[286] - Diluted earnings per share increased 17% to $3.63 in 2020 from $3.10 in 2019, driven by higher revenue, a lower tax rate, and stock repurchases[288] - Gross profit as a percentage of revenue decreased to 74.5% in 2020 from 76.0% in 2019, primarily due to higher freight costs and shifts in product and geographic mix[307] Liquidity and Capital Resources The company's liquidity remains strong, with cash from operations increasing to $379.1 million in 2020, supporting dividends, repurchases, and capital expenditures - Generated $379.1 million in cash from operations in 2020, a significant increase from $177.9 million in 2019[315] - Ended 2020 with $423.9 million in cash and cash equivalents, up from $344.0 million in 2019[316] - In 2020, the company repurchased 5.1 million shares for $144.3 million and paid $78.4 million in dividends[322][323] - As of Dec 31, 2020, the company had $337.5 million outstanding on its term loan and no borrowings under its $350 million revolving credit facility[321] Critical Accounting Policies and Estimates Management identifies Income Taxes and Intangible Assets as critical accounting policies, requiring significant judgment in valuation and impairment testing - The company's critical accounting policies are identified as Accounting for Income Taxes and Accounting for Intangible Assets[275] - As of December 31, 2020, the company had net deferred tax assets of $34.8 million and unrecognized tax benefits of $17.6 million[276][280] - Goodwill and indefinite-lived intangible assets are tested for impairment annually; no impairment charges were recognized in 2020, 2019, or 2018[283] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency and interest rate risks, managing the latter with interest rate swaps and monitoring the LIBOR transition - A majority of revenue is from outside the U.S., exposing the company to foreign currency risk, where a strengthening U.S. dollar negatively impacts reported revenue and earnings[331] - The company is exposed to interest rate risk on its variable-rate debt; as of Dec 31, 2020, a hypothetical 1% increase in rates would increase annual interest expense by about $1.4 million[336] - The company uses interest rate swaps to hedge variable cash flows associated with its variable-rate debt, with a total notional amount of $200 million as of year-end 2020[322][336] - The company is monitoring the planned phase-out of LIBOR, which is the reference rate for its credit facility and interest rate swaps[338] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2020, including balance sheets, income statements, and cash flow statements Consolidated Balance Sheet Data (as of Dec 31) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $1,957,076 | $1,769,006 | | Total Current Assets | $903,198 | $740,166 | | Total Liabilities | $1,062,805 | $893,717 | | Total Current Liabilities | $542,856 | $356,760 | | Long-term Debt | $305,393 | $334,461 | | Total Stockholders' Equity | $894,271 | $875,289 | Consolidated Income Statement Data (Year Ended Dec 31) | (in thousands, except per share) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | $2,581,934 | $2,420,416 | $2,679,008 | | Gross Profit | $1,923,906 | $1,838,996 | $2,044,868 | | Operating Income | $257,564 | $267,426 | $240,860 | | Net Income | $191,355 | $173,553 | $121,887 | | Diluted EPS | $3.63 | $3.10 | $2.16 | Consolidated Cash Flow Data (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $379,141 | $177,931 | $202,738 | | Net cash used in investing activities | ($79,428) | ($71,412) | ($108,761) | | Net cash used in financing activities | ($245,166) | ($154,794) | ($116,714) | | Net increase (decrease) in cash | $67,053 | ($51,281) | ($39,488) | 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[532] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[533] - Management concluded that internal control over financial reporting was effective as of December 31, 2020[535] Other Information The company reports no other information for this item - None[536] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Certain Relationships Information for these items will be incorporated by reference from the forthcoming 2021 Definitive Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the forthcoming 2021 Definitive Proxy Statement[538] Part IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including financial statements and various corporate exhibits Form 10-K Summary The company reports no summary for this item - None[545]