Nu Skin Enterprises, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report; it includes selected fourth-quarter information but is not a standalone Q4 filing. All amounts are U.S. dollars.
Business context
Nu Skin develops and sells beauty and wellness products through direct selling in approximately 50 markets, primarily under the Nu Skin, Pharmanex and ageLOC brands. About 84% of revenue came from outside the United States; Mainland China contributed approximately 24%. Its Rhyz investment businesses generated $150.2 million of external revenue, about 6% of consolidated revenue.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $2.582 billion | $2.420 billion |
| Gross profit / gross margin | $1.924 billion / 74.5% | $1.839 billion / 76.0% |
| Operating income / margin | $257.6 million / 10.0% | $267.4 million / 11.0% |
| Net income | $191.4 million | $173.6 million |
| Diluted EPS | $3.63 | $3.10 |
| Cash from operations | $379.1 million | $177.9 million |
| Cash and cash equivalents, plus current investments | $423.9 million | $344.0 million |
| Working capital | $360.3 million | $383.4 million |
Revenue increased 7%, while net income rose about 10% and diluted EPS rose 17%, aided by higher revenue, fewer weighted-average shares after repurchases and a lower effective tax rate. Gross margin fell 1.5 percentage points, principally due to higher expedited freight costs, geographic and product mix, and a larger contribution from lower-margin manufacturing revenue. General and administrative expense increased $30.9 million to $646.8 million, including higher employee incentive compensation; selling expense remained 39.5% of revenue. The effective tax rate declined to 25.3% from 32.0%.
Cash from operations more than doubled, reflecting stronger fourth-quarter trading and accrued commissions and employee incentives payable in early 2021. Investing cash outflow was $79.4 million, including $63.8 million of capital expenditures; financing cash outflow was $245.2 million. The company ended the year with $337.5 million of term-loan principal outstanding and no revolving-credit borrowings. The balance-sheet carrying value of debt was $335.4 million; $30 million of principal is due in 2021. The company reported compliance with its debt covenants and had a $350 million revolving facility available.
Material changes versus 2019
- Growth was concentrated in Americas/Pacific, up 47%, and EMEA, up 38%; the United States recorded $425.2 million of revenue, versus $324.7 million.
- Mainland China revenue fell 13% to $625.5 million, though the market returned to quarterly growth in Q4. South Korea was approximately flat at constant currency; Southeast Asia was approximately flat; Hong Kong/Taiwan declined 3%.
- Customers rose 34% to 1.56 million and Sales Leaders rose 29% to 70,435 at year-end. These measures count purchasers directly from the company and exclude consumers buying directly from sales-force members.
- Personal care revenue rose to $1.492 billion; wellness revenue rose to $922.6 million; other revenue, including external Rhyz sales, rose to $167.5 million.
- Rhyz Manufacturing revenue increased 22% to $149.3 million. Grow Tech remained loss-making, with segment contribution of negative $22.4 million.
Outlook, management commentary and risks
- Management attributed performance to digital transformation, social commerce and consumers spending more time online, as well as approximately $98 million of ageLOC Boost launch sales in 2020. It cautioned that online-shopping and social-selling trends may change as the pandemic subsides. The company planned further Boost launches in 2021.
- No consolidated 2021 revenue or earnings guidance is provided in the supplied filing text. Management estimated a 2021 effective tax rate of 26%–32%, capital expenditures of $55–$65 million for ordinary projects, plus $15–$20 million for a Mainland China manufacturing plant, and operating-lease payments of approximately $49 million. It also expected $30 million of term-loan principal payments and quarterly dividends of approximately $19–$20 million.
- Management said existing cash, operating cash flow and credit lines should fund expected needs, while noting that fourth-quarter accrued commissions and incentives would reduce first-quarter 2021 operating cash flow. It paid $78.4 million in 2020 dividends and repurchased approximately 5.1 million shares for $144.3 million; $325.8 million remained authorized under its buyback plan.
- COVID-19 disrupted in-person meetings, events, supply chains and shipping, with differing effects across regions. Key ongoing risks include Mainland China regulatory scrutiny and licensing, direct-selling and product-claim compliance, sales-force retention, social-platform policy changes, product registration, supplier and freight constraints, foreign exchange and cash-repatriation limits, and tax and litigation exposures.
- A Utah state-court dispute involving the company’s indoor-growing business includes a claim by the plaintiff to 50% ownership and profits and damages exceeding $250 million. The company disputes the claims; discovery was ongoing. Management also reported Grow Tech losses were expected to continue in 2021 and said it was evaluating strategic alternatives.
- CEO Ritch Wood announced he would step down effective September 1, 2021, with President Ryan Napierski expected to succeed him. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether the 2020 sales and customer gains—especially the Boost launch contribution and digital-channel growth—persist beyond pandemic conditions and launch-related purchasing.
- Whether Mainland China’s recovery continues, and how regulatory scrutiny, licenses, product registrations and cash-repatriation requirements affect the business.
- Whether margin pressure from freight, mix and manufacturing is temporary or persists, and whether cash generation remains strong after the first-quarter settlement of accrued commissions and incentives.
- The company’s ability to meet debt payments and maintain covenant compliance; review the $337.5 million principal balance, 2023 maturity profile and interest-rate exposure.
- Developments in the Roberts litigation, tax examinations and uncertain tax positions, and the outcome of management’s review of Grow Tech.