NU SKIN ENTERPRISES, INC. annual report, FY2021

Nu Skin Enterprises, Inc. — 2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. The company develops and sells beauty and wellness products through direct selling and digital/social commerce in approximately 50 markets; its Rhyz investment businesses include manufacturing and other ventures.

Financial performance

Metric	2021	2020	Change
Revenue	$2,695.7 million	$2,581.9 million	+4%
Gross margin	75.0%	74.5%	+0.5 percentage points
Operating income	$234.0 million	$257.6 million	Down
Operating margin	8.7%	10.0%	Down 1.3 percentage points
Net income	$147.3 million	$191.4 million	Down 23%
Diluted EPS	$2.86	$3.63	Down 21%
Cash from operations	$141.6 million	$379.1 million	Down $237.6 million

• Beauty revenue was $1,442.7 million, down from $1,491.8 million; wellness revenue rose to $1,062.5 million from $922.6 million. Rhyz external revenue was $174.7 million, or about 6% of reported revenue.
• Core Nu Skin gross margin increased 1.2 percentage points, primarily reflecting lower freight costs than in 2020. Consolidated results also included Grow Tech inventory write-offs and higher Manufacturing inventory reserves.
• General and administrative expenses rose to $666.4 million from $646.8 million, principally due to IT/cloud transition and digital-tool development. Restructuring and impairment expenses were $51.9 million.

Liquidity, cash flow and debt

• Year-end cash and cash equivalents plus current investments were $354.8 million, versus $423.9 million a year earlier. Working capital was $343.3 million, down from $360.3 million.
• Operating cash flow fell to $141.6 million, with inventory investment a significant use of cash: inventory increased to $399.9 million from $314.4 million. Management said it built inventory to support new-product demand and mitigate supply-chain risk.
• Year-end debt principal was $377.5 million: $307.5 million under the term loan and $70.0 million drawn on the revolving facility. Balance-sheet debt carrying value, net of issuance costs, was $376.3 million. The company reported compliance with its leverage and interest-coverage covenants.
• Management planned to refinance the credit agreement in the first half of 2022. It expected 2022 capital expenditures of $85–105 million and quarterly dividends of approximately $19–20 million; the $0.385-per-share quarterly dividend for March 2022 had been declared.

Material changes and management commentary

• Reported revenue increased 4%, but constant-currency revenue increased 2%; favorable currency movements benefited reported revenue by approximately 2% versus 2020. Fourth-quarter revenue declined 10% year over year.
• New launches Beauty Focus Collagen+ and ageLOC Meta generated approximately $119 million of 2021 revenue combined. Management attributed growth in the Americas and EMEA partly to social commerce and new products; U.S. revenue increased 32%.
• Sales Leaders declined 13% to 61,515 and Customers declined 12% to 1,367,559 at year-end. Management cited continued weakness in Mainland China, COVID-related disruption in Southeast Asia and economic challenges in Latin America. Mainland China revenue fell 9% reported and 15% at constant currency; its Customers fell 17%.
• The company decided to exit its Grow Tech controlled-environment agriculture business, expecting the wind-down to be substantially complete in the first half of 2022. The exit generated $58.5 million of pre-tax charges, including $6.6 million of inventory write-offs and $51.9 million of restructuring and impairment charges; a related $6.4 million income-tax charge was also reported.
• Management planned two connected devices for the second half of 2022 and continued a multi-year digital transformation that will require significant spending. It forecast a 2022 effective tax rate of approximately 24%–30%, but gave no clear revenue or EPS guidance in the filing.

Risks, contingencies and unusual items

• Mainland China remains a significant regulatory and operating risk: direct-selling rules restrict multi-level compensation, regulators have maintained heightened scrutiny, and new direct-selling licenses had not been issued since early 2019. China represented approximately 21% of 2021 revenue.
• The FTC notice sent to the company and subsidiaries in 2021 addressed earnings, money-making opportunity, endorsement and testimonial practices. The filing notes potential civil penalties of up to $43,792 per violation and uncertainty over how a violation may be defined.
• COVID-19, supply-chain disruption, foreign-exchange movements, changing social-media platform rules, product-claim restrictions, and the retention and productivity of the independent sales force could materially affect results.
• The company is defending a state-court dispute with Don Roberts, who claims partnership interests in the indoor-growing business and seeks damages exceeding $250 million. Nu Skin says it believes the claims are without merit; discovery was ongoing. The filing does not provide a clear estimate of the probable financial outcome.
• The effective tax rate rose to 36.6% from 25.3%, primarily because the Grow Tech exit reduced foreign-tax-credit utilization and increased valuation allowances. Tax audits and uncertain tax positions remain potential sources of additional expense.
• Auditors issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of year-end.

Important facts for investors to verify

1. Whether customer and Sales Leader declines stabilize, particularly in China, and whether social-commerce growth produces recurring purchases.
2. Whether 2022 operating cash flow recovers as inventory levels and commission/incentive payments normalize, and whether planned investment, dividends and repurchases remain supportable.
3. Terms and completion of the planned credit-agreement refinancing, including interest rates, maturity and covenant headroom.
4. Actual Grow Tech wind-down costs and the status and potential exposure of the Roberts litigation.
5. Progress against the 2022 tax-rate outlook and developments in foreign tax audits, China regulatory approvals and FTC compliance expectations.