Nu Skin(NUS) - 2021 Q2 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) Presents unaudited consolidated financial statements as of June 30, 2021, showing growth in revenue, net income, and changes in financial position Consolidated Balance Sheets Total assets increased to $2.05 billion, driven by inventories, while liabilities and equity also grew Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,049,980 | $1,957,076 | | Cash and cash equivalents | $354,759 | $402,683 | | Inventories, net | $390,977 | $314,366 | | Total Liabilities | $1,132,154 | $1,062,805 | | Current portion of long-term debt | $152,500 | $30,000 | | Total Stockholders' Equity | $917,826 | $894,271 | Consolidated Statements of Income Q2 2021 revenue increased 15% to $704.1 million, with net income up 41.8% to $59.3 million Q2 & H1 2021 vs 2020 Performance (in thousands, except per share) | Metric | Q2 2021 | Q2 2020 | % Change | H1 2021 | H1 2020 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $704,055 | $612,366 | +15.0% | $1,381,081 | $1,130,394 | +22.2% | | Operating Income | $85,376 | $58,074 | +47.0% | $148,289 | $94,639 | +56.7% | | Net Income | $59,338 | $41,851 | +41.8% | $106,768 | $61,581 | +73.4% | | Diluted EPS | $1.15 | $0.81 | +42.0% | $2.06 | $1.15 | +79.1% | Consolidated Statements of Cash Flows Operating cash flow sharply decreased to $1.9 million due to increased inventories and decreased accrued expenses Six Months Ended June 30 Cash Flow Summary (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,859 | $166,081 | | Net cash used in investing activities | ($55,235) | ($28,489) | | Net cash provided by/(used in) financing activities | $11,233 | ($92,533) | | Net (decrease) increase in cash | ($47,924) | $39,882 | - The significant decrease in operating cash flow was largely driven by an $80.2 million increase in inventories and a $55.4 million decrease in accrued expenses[29] Notes to Consolidated Financial Statements Details accounting policies, segment performance, debt, capital stock, and the MyFavoriteThings acquisition - The company reports revenue across ten segments: seven geographic Nu Skin segments and three Rhyz Investments segments (Manufacturing, Grow Tech, Rhyz other)[31][76] - As of June 30, 2021, the company had $322.5 million outstanding on its term loan and $120.0 million on its revolving credit facility[43] - During the first six months of 2021, the company repurchased 1.2 million shares for $60.4 million $265.4 million remained available for repurchases as of June 30, 2021[52] - In April 2021, the company acquired MyFavoriteThings, Inc. for $16.8 million in cash, with potential for an additional $24.0 million in contingent consideration This resulted in $12.6 million of goodwill[89] Management's Discussion and Analysis (MD&A) Q2 revenue grew 15% due to digital-first strategy, with EPS up 42%, despite decreased operating cash flow - Q2 2021 revenue increased 15% to $704.1 million, benefiting from a 6% positive impact from foreign currency fluctuations Sales Leaders grew 15% while Customers decreased 2% year-over-year[93] - The business continues to benefit from a strategic shift to digital and social commerce, which has been more broadly adopted in the Americas/Pacific and EMEA segments, driving their growth[94] - The company is continuing the launch of ageLOC Boost and is preparing for the launch of Beauty Focus Collagen+ and ageLOC Meta in the second half of 2021 and into 2022[94] - Cash from operations for H1 2021 was only $1.9 million, down from $166.1 million in H1 2020, primarily due to an $80.2 million increase in inventory and higher commission/incentive payouts[123] Segment Results EMEA led Q2 revenue growth at 64%, with Americas/Pacific also strong, while other regions varied Q2 2021 Revenue Growth by Segment (vs Q2 2020) | Segment | Revenue (USD M) | % Change | Constant Currency % Change | | :--- | :--- | :--- | :--- | | EMEA | $83.1 | +64% | +49% | | Americas/Pacific | $151.7 | +19% | +14% | | South Korea | $88.6 | +15% | +6% | | Southeast Asia | $70.8 | +6% | +2% | | Mainland China | $154.2 | +5% | -4% | | Hong Kong/Taiwan | $38.5 | +4% | 0% | | Japan | $68.0 | 0% | +1% | - The EMEA segment's growth was boosted by the ageLOC Boost launch, which generated $11.1 million in sales during the quarter[109] - The Americas/Pacific segment's performance was negatively impacted by economic instability in Argentina, which saw a 73% revenue decline in Q2[105] Liquidity and Capital Resources Cash and working capital decreased, with significant cash use for operations, capex, and repurchases - Projected capital expenditures for 2021 are estimated at $80-95 million, including $25-30 million for a new manufacturing plant in Mainland China[124] - The company plans to refinance its Credit Agreement, which includes a term loan and revolving credit facility, within the next twelve months[124] - As of June 30, 2021, the company held $321.2 million of its cash outside the U.S The company plans to repatriate most non-U.S. earnings, except for $60.0 million designated as indefinitely reinvested in Mainland China[128][129] Quantitative and Qualitative Disclosures about Market Risk Primary market risk is foreign currency fluctuations, managed with swaps, impacting revenue and earnings - A majority of revenue is generated outside the U.S., making reported results sensitive to U.S. dollar exchange rate fluctuations[140] - The company uses interest rate swaps to hedge against interest rate movements on its variable-rate debt and may use foreign currency exchange contracts to reduce exposure to currency fluctuations[71][142] - Highly inflationary accounting is used for the Argentina subsidiary, with the U.S. dollar as the functional currency[141] Controls and Procedures Disclosure controls and procedures were effective, with no material changes to internal controls - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2021[143] - No material changes were made to the internal control over financial reporting during the second quarter of 2021[144] Part II. Other Information Legal Proceedings No material developments in legal proceedings, with no expected adverse financial impact - No material developments have occurred concerning legal proceedings discussed in the 2020 Annual Report on Form 10-K[146] Risk Factors Supplements risk factors including direct selling regulations, COVID-19, economic conditions, and ESG matters - The U.S. Federal Trade Commission (FTC) is reviewing its Business Opportunity Rule If the exemption for multi-level marketing companies is removed, it could negatively impact the business[149] - The COVID-19 pandemic and its variants continue to pose risks by interrupting supply chains, impacting sales force activities, and potentially affecting the company's ability to comply with debt covenants[151][152] - Difficult economic conditions, including potential inflation, could reduce consumer demand for the company's products[154] - Increased stakeholder focus on corporate citizenship and sustainability (ESG) matters presents a risk if the company fails to meet expectations or achieve its stated goals[155] Unregistered Sales of Equity Securities and Use of Proceeds Repurchased 184,723 shares at $54.16 average price in Q2 2021, with $265.4 million remaining Issuer Purchases of Equity Securities (Q2 2021) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining (in millions) | | :--- | :--- | :--- | :--- | | April 1 - 30, 2021 | 115,209 | $52.44 | $269.4 | | May 1 - 31, 2021 | 66,299 | $56.83 | $265.6 | | June 1 - 30, 2021 | 3,215 | $60.45 | $265.4 | | Total | 184,723 | $54.16 | $265.4 | Other Information CFO Mark H. Lawrence's compensation adjusted, with salary increased to $575,000 and higher equity award - CFO Mark H. Lawrence's salary was increased to $575,000, and his 2022 annual equity award is anticipated to be approximately $1,300,000[160]