NU SKIN ENTERPRISES, INC. The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes, which are included in this Annual Report on Form 10-K.
Business Overview
Our Products
Nu Skin Enterprises, Inc. develops and distributes a comprehensive line of premium-quality beauty and wellness solutions in approximately 50 markets worldwide. In 2020, our revenue of$2.6 billion was primarily generated by our three primary brands: our beauty and personal care brand,Nu Skin ; our wellness products brand, Pharmanex; and our anti-aging brand, ageLOC. We operate in the direct selling channel, primarily utilizing person-to-person marketing to promote and sell our products. In all of our markets besides Mainland China, we refer to members of our independent sales force as "Brand Affiliates" because their primary role is to promote our brand and products through their personal and social networks. In addition to our coreNu Skin business, we also explore new areas of growth and opportunity through our strategic investment arm known asRhyz Inc. Rhyz investments include personal care and nutritional product manufacturing companies and indoor-growing technologies, which are sometimes referred to as controlled-environment agriculture. In 2020, the Rhyz companies generated$150.2 million , or 6%, of our 2020 reported revenue (excluding sales to our coreNu Skin business), substantially all of which was from the manufacturing companies.
Our Global Operations
Nu Skin's operations span approximately 50 markets with approximately 84% of our 2020 revenue coming from outside ofthe United States . Given the size of our international operations, our results, as reported inU.S. dollars, are often impacted by foreign-currency fluctuations. In 2020, the impact from foreign-currency fluctuations on our revenue was flat compared to 2019. In addition, our results can be impacted by global economic, political, demographic and business trends and conditions.
A Global Network of Sales Leaders and Customers
As ofDecember 31, 2020 , we had 1,557,302 persons who purchased products directly from the company during the previous three months ("Customers"). We believe a significant majority of Customers purchase our products primarily for personal or family consumption but are not actively pursuing the opportunity to generate income by marketing and reselling products. Our revenue is highly influenced by the number and productivity of our Sales Leaders. "Sales Leaders" are our Brand Affiliates, and sales employees and independent marketers in Mainland China, who achieve certain qualification requirements. Our Sales Leaders are also included in our Customer numbers, as they purchase products from the company and are within the definition of our "Customers."
We have been successful in attracting and motivating our sales force by:
? developing and marketing innovative, technologically and scientifically
advanced products;
? providing compelling initiatives and strong support; and
? offering an attractive sales compensation structure.
Our global sales force helps us to rapidly introduce products and penetrate our
markets with modest up-front promotional expense. We rely on our sales force to
create consumer demand for our products, as opposed to a traditional approach of
advertising-generated consumer awareness. Our approach is particularly effective
with products that benefit from personal education and demonstration. Similar to
other companies in our industry, we experience relatively high turnover among
our sales force.
To enhance customer retention, we have developed product subscription and
loyalty programs that provide incentives for consumers to commit to purchase a
specific amount of product on a monthly basis. All purchases under these
programs are subject to our standard product payment and return policies. We
believe these subscription and loyalty programs have improved consumer
retention, have had a stabilizing impact on revenue and have helped generate
recurring sales.
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Table of Contents
Product Innovation
Our sales force markets and sells our products, and attracts others to the
opportunity, based on the distinguishing benefits and innovative characteristics
of our products. As a result, we leverage our scientific expertise and product
development resources to introduce innovative beauty, wellness and anti-aging
products. Our sales force is increasingly using social media to market and sell
our products. To continue to leverage social media, it is imperative that we
develop demonstrable products that are unique and engaging to younger consumers.
Any delays or difficulties in introducing compelling products or attractive initiatives or tools into our markets may have a negative impact on our revenue and our number of Customers and Sales Leaders.
Our Product Launch Process
We use a variety of methods to launch our products, enabling us to tailor the launch process to the specific market and the specific product. Prior to making a key product generally available for purchase, we often do one or more introductory offerings of the product, such as a preview of the product to our Sales Leaders or other product introduction or promotion. These offerings may generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue during the quarter and can skew year-over-year and sequential comparisons. We believe our product launch process attracts new Customers and Sales Leaders to our business, increases consumer trial and provides important marketing and forecasting information about the products to our company.
Beginning in the second half of 2020 and continuing into 2021, we are launching our ageLOC Boost beauty device system.
Income Statement Presentation
We report revenue in nine segments, and we translate revenue from each market's local currency intoU.S. dollars using weighted-average exchange rates. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with revenue recognized at shipping point, the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. In most markets, we offer a return policy that allows our sales force to return unopened and unused product for up to 12 months subject to a 10% restocking fee. Reported revenue is net of returns, which have historically been less than 5% of annual revenue. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
Cost of sales primarily consists of:
? cost of products purchased from third-party vendors;
? costs of self-manufactured products;
? cost of adjustments to inventory carrying value;
? freight cost of shipping products to our sales force and import duties for the
products; and
? royalties and related expenses for licensed technologies.
For markets other than Mainland China, in 2020, we sourced most of our personal care products and wellness products from trusted third-party suppliers and manufacturers. In Mainland China, we operate manufacturing facilities where we produce the majority of our personal care products and nutritional supplements sold in Mainland China. We also produce some products at these facilities that are exported to other markets. In 2018 and 2020 we acquired a total of four companies inthe United States that are producing some of our products. Cost of sales and gross profit, on a consolidated basis, may fluctuate as a result of changes in the ratio between self-manufactured products and products sourced from third-party vendors. In addition, because we purchase a significant amount of our goods inU.S. dollars and recognize revenue in local currencies, our gross margin is subject to exchange rate risks. Because our gross margins vary from product to product and due to higher pricing in some markets, changes in product mix and geographic revenue mix can impact our gross margin on a consolidated basis. 43 -------------------------------------------------------------------------------- Table of Contents Selling expenses are our most significant expense and are classified as operating expenses. Selling expenses include sales commissions paid to our sales force, special incentives, costs for incentive trips and other rewards, as well as salaries, service fees, benefits, bonuses and other labor and unemployment expenses we pay to our sales force in Mainland China. Selling expenses do not include amounts we pay to our sales force based on their personal purchases; rather, such amounts are reflected as reductions to revenue. Our global sales compensation plan, which we employ in all our markets except Mainland China, is an important factor in our ability to attract and retain our Sales Leaders. Under our global sales compensation plan, Sales Leaders can earn "multi-level" compensation, where they earn commissions for product sales to their consumer groups as well as the product sales made through the sales network they have developed and trained. We do not pay commissions on sales materials. Fluctuations occur in the amount of commissions paid as our numbers of Customers and Sales Leaders change from month to month, but the fluctuation in the overall payout as a percentage of revenue tends to be relatively small. Selling expenses as a percentage of revenue typically increase in connection with a significant product offering, due to growth in the number of Sales Leaders qualifying for increased sales compensation and promotional incentives. From time to time, we make modifications and enhancements to our global sales compensation plan in an effort to help motivate our sales force and develop leadership characteristics, which can have an impact on selling expenses. For example, in the fourth quarter of 2017, we began to implement significant enhancements to our global sales compensation plan, which we have now rolled out across all markets other than Mainland China. One of the changes is a new bonus program for our sales force, which has an increasing effect on our selling expenses as a percentage of revenue. Outside of Mainland China, Brand Affiliates also have the opportunity to make profits by purchasing products from us at a discount and selling them to consumers with a mark-up. We do not account for, nor pay, additional commissions on these mark-ups received by Brand Affiliates. In many markets, we also allow individuals who are not part of our sales force, whom we refer to as "preferred customers," to buy products directly from us at a discount. We pay commissions on preferred customer purchases to the referring member of our sales force.
General and administrative expenses include:
? wages and benefits; ? rents and utilities;
? depreciation and amortization;
? promotion and advertising; ? professional fees; ? travel;
? research and development; and
? other operating expenses. Labor expenses are the most significant portion of our general and administrative expenses. Promotion and advertising expenses include costs of sales force conventions held in various markets worldwide, which we generally expense in the period in which they are incurred. Because our various sales force conventions are not held during each fiscal year, or in the same period each year, their impact on our general and administrative expenses may vary from year to year and from quarter to quarter. For example, we held our global convention inOctober 2019 and will have another global convention in the fall of 2021, as we currently plan to hold a global convention every other year. In addition, we hold regional conventions and conventions in our major markets at different times during the year. These conventions have significant expenses associated with them. Because we have not incurred expenses for these conventions during every fiscal year or in comparable interim periods, year-over-year comparisons have been impacted accordingly. Provision for income taxes depends on the statutory tax rates in each of the jurisdictions in which we operate. For example, statutory tax rates in 2020 were approximately 17% inHong Kong , 20% inTaiwan , 25% inSouth Korea , 36% inJapan and 25% in Mainland China. We are subject to taxation inthe United States at the statutory corporate federal tax rate of 21% in 2020, and we pay taxes in multiple states withinthe United States at various tax rates. Our overall effective tax rate was 25.3% for the year endedDecember 31, 2020 . 44 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates The following critical accounting policies and estimates should be read in conjunction with our audited consolidated financial statements and related notes thereto. Management considers our critical accounting policies to be accounting for income taxes and accounting for intangible assets. In each of these areas, management makes estimates based on historical results, current trends and future projections. Income Taxes. We account for income taxes in accordance with the Income Taxes Topic of the Financial Accounting Standards Codification. This Topic establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise's activities during the current and preceding years. We take an asset and liability approach for financial accounting and reporting of income taxes. We pay income taxes in many foreign jurisdictions based on the profits realized in those jurisdictions, which can be significantly impacted by terms of intercompany transactions betweenNu Skin affiliates around the world. Deferred tax assets and liabilities are created in this process. As ofDecember 31, 2020 , we had net deferred tax assets of$34.8 million . We net these deferred tax assets and deferred tax liabilities by jurisdiction. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be ultimately realized. These deferred tax assets assume sufficient future earnings will exist for their realization, and are calculated using anticipated tax rates. In certain jurisdictions, valuation allowances have been recorded against the deferred tax assets specifically related to use of foreign tax credits, research and development credits and net operating losses. When we determine that there is sufficient taxable income to utilize the foreign tax credits, the research and development credits, or the net operating losses, the valuation allowances will be released. In the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination was made. We evaluate our indefinite reinvestment assertions with respect to foreign earnings for each period. Other than earnings we intend to reinvest indefinitely, we accrue for theU.S. federal and state income taxes applicable to the earnings. For all foreign earnings, we accrue the applicable foreign income taxes. We intend to utilize the offshore earnings to fund foreign investments, specifically capital expenditures. Undistributed earnings that we have indefinitely reinvested aggregate to$60.0 million as ofDecember 31, 2020 . If this amount were repatriated tothe United States , the amount of incremental taxes would be approximately$6.0 million . We file income tax returns in theU.S. federal jurisdiction and in various state and foreign jurisdictions. We are no longer subject to tax examinations from theIRS for all years for which tax returns have been filed before 2020. With a few exceptions, we are no longer subject to state and local income tax examination by tax authorities for the years before 2017. In 2009, we entered into a voluntary program with theIRS called Compliance Assurance Process ("CAP"). The objective of CAP is to contemporaneously work with theIRS to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. We have elected to participate in the CAP program for 2021 and may elect to continue participating in CAP for future tax years; we may withdraw from the program at any time. In major foreign jurisdictions, we are generally not subject to income tax examinations for years before 2014. However, statutes in certain markets may be as long as ten years for transfer pricing related issues. We are currently under examination in certain foreign jurisdictions; however, the outcomes of those reviews are not yet determinable. Our unrecognized tax benefits are related to multiple foreign and domestic jurisdictions. Due to potential changes in unrecognized tax benefits from the multiple jurisdictions in which we operate, as well as the expiration of various statutes of limitation, it is reasonably possible that our gross unrecognized tax benefits, net of foreign currency adjustments, may decrease within the next 12 months by a range of approximately$2.5 to$3.5 million . AtDecember 31, 2020 , we had$17.6 million in unrecognized tax benefits of which$17.6 million , if recognized, would affect the effective tax rate. In comparison, atDecember 31, 2019 , we had$13.5 million in unrecognized tax benefits of which$13.5 million , if recognized, would affect the effective tax rate. We recognized an increase of approximately$1.5 million in interest and penalties expense during the year endedDecember 31, 2020 and$0.7 million in interest and penalties during the year endedDecember 31, 2019 . We had approximately$5.1 million ,$3.6 million and$2.9 million of accrued interest and penalties related to uncertain tax positions atDecember 31, 2020 , 2019 and 2018, respectively. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense. We are subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. We account for such contingent liabilities in accordance with relevant accounting standards and believe we have appropriately provided for income taxes for all years. Several factors drive the calculation of our tax reserves. Some of these factors include: (i) the expiration of various statutes of limitations; (ii) changes in tax law and regulations; (iii) issuance of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors may result in adjustments to our reserves, which would impact our reported financial results. 45 -------------------------------------------------------------------------------- Table of Contents Intangible Assets. Acquired intangible assets may represent indefinite-lived assets, determinable-lived intangibles or goodwill. Of these, only the costs of determinable-lived intangibles are amortized to expense over their estimated life. The value of indefinite-lived intangible assets and residual goodwill is not amortized, but is tested at least annually for impairment. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangibles. We test goodwill for impairment, at least annually, by reviewing the book value compared to the fair value at the reportable unit level. Beginning in 2011, we had the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If under the quantitative assessment the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured. We used the quantitative assessment for fiscal year 2020. We elected to perform the qualitative assessment for fiscal years 2019 and 2018. Considerable management judgment is necessary to measure fair value. We did not recognize any impairment charges for goodwill or intangible assets during the periods presented.
Results of Operations
The following table sets forth our operating results as a percentage of revenue
for the periods indicated:
Year Ended December 31,
2020 2019 2018
Revenue 100.0 % 100.0 % 100.0 %
Cost of sales 25.5 24.0 23.7
Gross profit 74.5 76.0 76.3
Operating expenses:
Selling expenses 39.5 39.5 40.0
General and administrative expenses 25.0 25.4 24.7
Restructuring and impairment expenses - - 2.6
Total operating expenses 64.5 64.9 67.3
Operating income 10.0 11.0 9.0
Other income (expense), net (0.1 ) (0.5 ) (0.8 )
Income before provision for income taxes 9.9 10.5 8.2
Provision for income taxes 2.5 3.4 3.7
Net income 7.4 % 7.2 % 4.5 %
2020 Compared to 2019
Overview
Revenue in 2020 increased 7% to $2.58 billion from $2.42 billion in 2019. As of
the end of the fourth quarter of 2020, Sales Leaders increased 29% and Customers
increased 34% compared to the prior year.
Our results benefited from our strategic shift to become a more digital
business, as well as the current environment where consumers are spending more
time online and working from home, and our sales leaders have been able to
leverage the power of social sharing to achieve greater levels of productivity.
If and when the COVID-19 pandemic subsides, there is uncertainty as to the
impact on trends towards online shopping and how our business would be impacted
by changes in those trends. Our 7% revenue growth was driven by solid growth in
our Americas /Pacific and EMEA segments, where our Brand Affiliates have more
broadly adopted social commerce to share our products. The pandemic negatively
impacted our Asia markets more heavily, as our sales force generally relies more
on in-person meetings in those markets and the social sharing model is less
mature. Our 2020 results also benefited from our continued technology
enhancements and approximately $98 million of sales as part of our ageLOC Boost
product launch.
Earnings per share in 2020 increased 17% to $3.63 from $3.10 in 2019. The
increase in earnings per share is primarily driven by the increase in revenue,
lower weighted-average outstanding shares due to our stock repurchases and a
lower tax rate, partially offset by increases in freight cost and general and
administrative expenses.
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Table of Contents
Segment Results
We report our business in nine segments to reflect our current management
approach. These segments consist of our seven geographic Nu Skin
segments-Mainland China, Americas /Pacific, South Korea , Southeast Asia , Japan ,
Hong Kong /Taiwan , and EMEA-and our Manufacturing and Grow Tech segments. The
Other category includes miscellaneous corporate revenue and related adjustments.
The following table sets forth revenue for the years ended
Constant
Year Ended December 31, Currency
2020 2019 Change Change(1)
Nu Skin
Mainland China $ 625,538 $ 722,526 (13 )% (14 )%
Americas/Pacific 511,941 349,078 47 % 53 %
South Korea 326,478 329,978 (1 )% -
Southeast Asia 302,708 301,620 - 1 %
Japan 273,681 260,039 5 % 3 %
EMEA 230,246 167,165 38 % 35 %
Hong Kong/ Taiwan 161,117 166,335 (3 )% (6 )%
Other (17 ) 1,621 (101 )% (101 )%
Total Nu Skin 2,431,692 2,298,362 6 % 6 %
Manufacturing 149,339 121,917 22 % 22 %
Grow Tech 903 137 559 % 559 %
Total $ 2,581,934 $ 2,420,416 7 % 7 %
(1) Constant-currency revenue change is a non-GAAP financial measure. See
"Non-GAAP Financial Measures," below.
The table below sets forth segment contribution for the years endedDecember 31, 2020 and 2019 for each of our reportable segments (U.S. dollars in thousands). Segment contribution excludes certain intercompany charges, specifically royalties, license fees, transfer pricing and other miscellaneous items. We use segment contribution to measure the portion of profitability that the segment managers have the ability to control for their respective segments. For additional information regarding our segments and the calculation of segment contribution, see Note 15 to the consolidated financial statements contained in this report. Year Ended December 31, 2020 2019 ChangeNu Skin Mainland China$ 181,024 $ 191,570 (6 )% Americas/Pacific 91,627 57,090 60 % South Korea 100,933 99,892 1 % Southeast Asia 75,538 82,455 (8 )% Japan 68,027 61,081 11 % EMEA 24,078 10,195 136 % Hong Kong/Taiwan 33,466 33,569 - Total Nu Skin 574,693 535,852 7 % Manufacturing 21,168 15,693 35 % Grow Tech (22,430 ) (19,509 ) (15 )% 47
-------------------------------------------------------------------------------- Table of Contents The following table provides information concerning the number of Customers and Sales Leaders as ofDecember 31, 2020 and 2019. "Customers" are persons who have purchased products directly from the Company during the three months ended as of the date indicated. Our Customer numbers do not include consumers who purchase products directly from members of our sales force. "Sales Leaders" are our Brand Affiliates, and sales employees and independent marketers in Mainland China, who achieve certain qualification requirements. As of December 31, 2020 As of December 31, 2019 % Increase (Decrease) Customers Sales Leaders Customers Sales Leaders Customers Sales Leaders Mainland China 381,460 21,990 292,812 17,987 30 % 22 % Americas/Pacific 404,955 14,439 220,216 7,607 84 % 90 % South Korea 158,953 7,059 168,972 7,251 (6 )% (3 )% Southeast Asia 154,355 8,903 136,349 7,480 13 % 19 % Japan 128,400 6,318 125,557 5,916 2 % 7 % EMEA 258,587 7,063 153,330 4,619 69 % 53 % Hong Kong/Taiwan 70,592 4,663 65,669 3,900 7 % 20 % Total 1,557,302 70,435 1,162,905 54,760 34 % 29 %
Following is a narrative discussion of our results in each segment, which supplements the tables above.
MainlandChina . Our Mainland China market was able to return to growth in the fourth quarter of 2020, with revenue of$172.4 million for the quarter compared to$154.7 million for the prior-year quarter. Our fourth-quarter reported revenue also reflects a benefit of 6% from foreign-currency fluctuations. While full year 2020 revenue decreased 13%, this segment generated improving trends as the year progressed. The year-over-year decrease in revenue in Mainland China for 2020 reflects the 2019 contraction of our business in this market, compounded by the impact of COVID-19 and the related public-health restrictions, which severely limited large in-person meetings in 2020. Our Customers and Sales Leaders increased 30% and 22%, respectively, benefiting from our fourth quarter ageLOC Boost preview, along with successful customer initiatives, including the second quarter launch of a new loyalty program. We generated approximately$53 million of ageLOC Boost sales during 2020, including approximately$33 million during the fourth quarter. We continue to focus on and implement technology solutions to better enable us and our sales force to participate in virtual meetings, conduct online trainings and perform digital product expos and promotions. The year-over-year decrease in segment contribution primarily reflects lower revenue in 2020. This was partially offset by a 1.6 percentage-point increase in gross margin as a percentage of revenue due to changes in product mix along with a 1.6 percentage-point decrease in selling expense as a percentage of revenue for 2020. The salaries and service fees of our sales force in Mainland China are fixed until they are adjusted in a quarterly evaluation process. As a result, we have variations in our selling expenses as a percentage of revenue, particularly when there is a sequential change in revenue. General and administrative expenses decreased$10.6 million , primarily due to lower expenses associated with sales force events due to COVID-19 restrictions.Americas /Pacific. OurAmericas /Pacific markets continue to benefit from greater adoption of innovative products shared increasingly via the social commerce business model supported by our digital tools, combined with the current environment where consumers are spending more time at home, shopping and working online. This contributed to a 47% increase in revenue for 2020. The new social and digital tools as well as strong sales leadership in social sharing in these markets have enabled our sales force to more effectively transact business digitally, which has been beneficial to our business during the COVID-19 pandemic. These factors also led to a significant increase in Customers and Sales Leaders. OurLatin America markets continue to show significant momentum, with increasing digital maturity leveraging a highly social demographic of Sales Leaders. Our reported revenue also reflects a negative currency impact of 6% for 2020, primarily due to the weakening of ourLatin America markets' currencies against theU.S. Dollar, especially theArgentina peso. In our U.S. market, we plan to introduce and launch ageLOC Boost during late 2021. The year-over-year increase in segment contribution for 2020 primarily reflects the increase in revenue and a decrease in selling expenses as a percentage of revenue. These factors were partially offset by a lower gross margin, which primarily reflects an increase in freight cost and changes in our product mix, with a higher shift to devices, which carry a lower gross margin than our otherNu Skin products. Additionally, general and administrative expenses increased for 2020, primarily reflecting higher labor expenses to support growth and higher employee incentive compensation from exceeding our incentive targets, as well as expenses associated with a regional convention during 2020, although as a percentage of revenue it decreased 3.2 percentage points due to the higher revenue. The rapid growth in ourAmericas /Pacific region has placed a strain on our resources and required additional air freight of our products, particularly in theLatin America markets in order to meet the increasing demand. 48 -------------------------------------------------------------------------------- Table of ContentsSouth Korea . OurSouth Korea segment's 2020 constant-currency revenue was flat compared to 2019; our reported revenue reflects a negative currency impact of 1% for 2020. Our Customers and Sales Leaders declined for 2020 as a result of the impacts from COVID-19 and associated local in-person meeting restrictions.
Segment contribution increased 1%, reflecting a slight increase in gross margin due to a product shift to higher-margin products.
Southeast Asia . OurSoutheast Asia segment revenue was even for the year. As previously disclosed, the impacts from the COVID-19 outbreak lasted longer in this segment than in many of our other markets. Sales Leaders and Customers increased 19% and 13%, respectively, primarily from local promotions and excitement surrounding the fourth quarter ageLOC Boost launch.
The year-over-year decrease in segment contribution for 2020 primarily reflects the decline in revenue and a lower gross margin due to increased sales promotions.
The year-over-year increase in segment contribution reflects the increased revenue and a$1.7 million decline in general and administrative expenses, or 1.4 percentage points as a percent of sales, mainly from lower expenses related to sales force events, due to COVID-19 restrictions. EMEA. Our EMEA segment had a strong 2020, benefiting from further adoption of the social sharing business model supported by our digital tools, combined with the current environment where consumers are spending more time shopping and working online. This contributed to a 38% increase in revenue, 53% increase in Sales Leaders and 69% increase in Customers. Our reported revenue also benefited 3% from foreign-currency fluctuations for 2020. Similar to ourAmericas /Pacific segment, the strong sales leadership in social sharing has allowed the EMEA segment to more effectively transact business digitally, which has been beneficial to our business during the COVID-19 pandemic. In our EMEA segment, we plan to introduce and launch ageLOC Boost during 2021. The strong improvement in segment contribution for 2020 is primarily attributable to higher revenue and the fixed nature of general and administrative expenses, partially offset by a lower gross margin from higher freight cost and a shift in product mix to more devices, which carry a lower margin. The rapid growth in this region has placed a strain on our resources and required additional air freight of our products to meet the increasing demand.
We currently do not expect that the
Hong Kong /Taiwan . OurHong Kong /Taiwan segment continues to be challenged from the ongoing decline from 2019 and further impacted by the social incidents inHong Kong and COVID-19, with 3% decline in revenue. Our Customers and Sales Leaders increased from fourth-quarter product launches. Our reported revenue benefited 3% from foreign-currency fluctuations for 2020.
Segment contribution remained flat for 2020 compared to 2019.
Manufacturing. Our Manufacturing segment generated a 22% increase in revenue for 2020. Our previous investments in additional capacity have allowed our manufacturing companies to continue to increase revenue as the demand for nutrition and personal care products continues to expand.
The
Grow Tech. Our Grow Tech segment continues to invest in controlled-environment
agriculture technologies. We have found that some of this technology has broader
applications in agriculture, and we are investing to pursue these potential
opportunities. We are expecting continued losses in 2021 from this segment as we
continue to research and refine the technology. We are currently evaluating
strategic alternatives with respect to this business.
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--------------------------------------------------------------------------------Table of Contents Consolidated Results Revenue
Revenue for the year ended
Gross profit
Gross profit as a percentage of revenue decreased to 74.5% in 2020, compared to 76.0% in 2019. Gross profit as a percentage of revenue for coreNu Skin decreased 1.4% to 77.0%. OurNu Skin gross profit was negatively impacted by higher freight cost during 2020 due to expediting orders to meet higher demand. Also contributing to the lower gross margin is that the growth in ourNu Skin business was primarily in theAmericas and EMEA, which have lower gross margins than other markets, combined with an overall increase in our sales percentage from our Manufacturing segment which produces a lower gross margin.
Selling expenses
Selling expenses as a percentage of revenue was 39.5% for both 2020 and 2019. Our coreNu Skin business's selling expense as a percentage of revenue increased 0.3 percentage points to 41.9% for 2020, compared to 41.6% for 2019. Selling expenses for our coreNu Skin business are driven by the specific performance of our individual Sales Leaders. Given the size of our sales force and the various components of our compensation and incentive programs, selling expenses as a percentage of revenue typically fluctuate plus or minus approximately 100 basis points from period to period.
General and administrative expenses
General and administrative expenses increased to$646.8 million in 2020, compared to$616.0 million in 2019. The$30.9 million increase primarily relates to an increase of$57.3 million in labor expense associated with employee incentive compensation in 2020 upon achievement of performance goals, partially offset by decreases of$11.3 million for travel and$20.8 million for sales force events as a result of COVID-19 restrictions that were in place during 2020 and our 2019 global convention, which we hold every other year. As a percentage of revenue, general and administrative decreased 0.4% to 25.0% for 2020, compared to 25.4% for 2019.
Other income (expense), net
Other income (expense), net for 2020 was$(1.3) million of expense, compared to$(12.3) million of expense in 2019. The decrease in expense primarily reflects an$6.1 million decrease in interest expense due to a decline in interest rates, along with a lower average balance outstanding on our revolving credit facility during 2020 than 2019. Provision for income taxes Provision for income taxes decreased to$64.9 million in 2020 from$81.6 million in 2019. Our effective tax rate decreased to 25.3% of pre-tax income in 2020 from 32.0% in 2019. The decrease in the effective tax rate for 2020 primarily reflects the strong growth in the U.S. market and Manufacturing segment, which enabled us to utilize additional foreign tax credits to offset theU.S. income taxes. For 2021, we currently anticipate that our effective tax rate will be approximately 26-32%. Our actual 2021 effective tax rate could differ materially from this estimate. Our future effective tax rates could fluctuate significantly, being affected by numerous factors, such as intercompany transactions, changes in our business operations, foreign audits, increases in uncertain tax positions, acquisitions, entry into new markets, the amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have a lower statutory rate and higher than anticipated in jurisdictions where we have a higher statutory rate, losses incurred in jurisdictions, the inability to realize tax benefits, withholding taxes, changes in foreign currency exchange rates, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation.
Net income
As a result of the foregoing factors, net income in 2020 increased to
2019 Compared to 2018
For a comparison of our operating results for 2019 compared to 2018, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 37 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , as filed with theSEC onFebruary 13, 2020 . 50 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Historically, our principal uses of cash have included operating expenses (particularly selling expenses) and working capital (principally inventory purchases), as well as capital expenditures, stock repurchases, dividends, debt repayment and the development of operations in new markets. We have at times incurred long-term debt, or drawn on our revolving line of credit, to fund strategic transactions, stock repurchases, capital investments and short-term operating needs. We typically generate positive cash flow from operations due to favorable margins and have generally relied on cash from operations to fund operating activities. We generated$379.1 million in cash from operations during 2020, compared to$177.9 million in cash from operations during 2019. This increase in cash generated from operations during 2020 primarily reflects the strong fourth quarter of 2020, with a 28% increase in revenue over the fourth quarter of 2019. The fourth-quarter growth additionally caused an increase in our accrued commission payments and accrued employee incentive payments to be made in first quarter of 2021. The payment of these accrued expenses will have a negative impact our cash from operations in the first quarter of 2021. As ofDecember 31, 2020 , cash and cash equivalents, including current investments, were$423.9 million compared to$344.0 million as ofDecember 31, 2019 . This increase in cash and cash equivalents primarily reflects strong cash from operations, partially offset by the quarterly dividend payments, debt repayments, repurchases of our stock and purchases of property and equipment. Working capital as ofDecember 31, 2020 was$360.3 million compared to$383.4 million as ofDecember 31, 2019 . The slight decrease in working capital was primarily attributable to an increase of$156.4 million in accrued expenses due to our fourth-quarter growth and an increase in accounts payable of$27.2 million from increased inventory purchases due to sales growth mainly in our Manufacturing segment, partially offset by a$38.5 million increase in inventory, an increase in prepaid expenses and other from a deposit becoming collectible in the next 12 months related to our lease of a facility inSouth Korea , and an increase in cash and cash equivalents.
Cash requirements. For 2021, we currently expect that our material cash requirements will include the following:
? Cash requirements for operating activities. Our operating expenses typically
total approximately 85%-90% of our revenue, with compensation to our sales
force constituting 40%-42% of our core
expenses consist primarily of commission payments, which we generally pay to
our sales force within approximately one to two months of the sale. Inventory
purchases have historically constituted approximately 15%-20% of our revenue.
On average, we purchase our inventory approximately three to six months prior
to sale. While our actual cash usage may vary based on the timing of payments,
we currently expect these approximate percentages and payment practices to
continue in 2021. In addition we expect our 2021 operating lease payments will
be approximately
? Cash requirements for investing activities. As discussed in more detail below,
our capital expenditures are expected to be
? Cash requirements for financing activities. In 2021 we are obligated to make a
total of
interest on our term loan. We also anticipate paying quarterly cash dividends
throughout 2021, approximating
number of shares outstanding as of record date. Additional details about our
dividends and term loan are provided below.
For 2022 and onward, we currently expect the above material cash requirements will remain. See Note 6 and Note 7 to the consolidated financial statements contained in this report for our future cash requirements related to our debt principal repayment and our maturities of lease liabilities.
We intend to fund the aforementioned cash requirements with our cash from operations and draw on our revolving credit facility, as needed, to address any short-term funding requirements.
Capital expenditures. Capital expenditures in 2020 totaled
? the expansion and upgrade of facilities in our various markets; and
? purchases and expenditures for computer systems and equipment, software, and
application development. We estimate that capital expenditures for the uses listed above will total approximately$55-65 million for 2021. In addition, we are also in the building phase for a new manufacturing plant in Mainland China. To date we have spent approximately$22 million and expect that our expenditures for this project will total approximately$55 million over the next 1-2 years, including approximately$15-20 million during 2021. 51 -------------------------------------------------------------------------------- Table of Contents Credit agreement. InApril 2018 , we entered into a Credit Agreement (the "Credit Agreement") with various financial institutions as lenders andBank of America, N.A ., as administrative agent. The Credit Agreement provides for a$400.0 million term loan facility and a$350.0 million revolving credit facility, each with a term of five years. We used the proceeds of the term loan and the draw on the revolving facility to pay off our previous credit agreement and the outstanding balance on our 2016 convertible notes that were converted at the election of the holder in the first quarter of 2018. The interest rate applicable to the facilities is subject to adjustments based on our consolidated leverage ratio. The term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 5.0% during the first and second years, 7.5% during the third and fourth years and 10.0% during the fifth year after the closing date of the Credit Agreement, with the remainder payable at final maturity. As ofDecember 31, 2020 and 2019, we had no outstanding borrowings under our revolving credit facility, and$337.5 million and$365.0 million remaining balance on our term loan facility. The carrying value of the debt also reflects debt issuance costs of$2.1 million and$3.0 million as ofDecember 31, 2020 and 2019, respectively, related to the Credit Agreement. The Credit Agreement requires us to maintain a consolidated leverage ratio not exceeding 2.25 to 1.00 and a consolidated interest coverage ratio of no less than 3.00 to 1.00. We are currently in compliance with all debt covenants under the Credit Agreement. Derivative instruments. As ofDecember 31, 2020 , we had four interest rate swaps, with a total notional principal amount of$200 million and a maturity date ofJuly 31, 2025 . We entered into these interest rate swap arrangements during the third quarter of 2020 to hedge the variable cash flows associated with our variable-rate debt under the Credit Agreement. Stock repurchase plan. In 2018, our board of directors approved a stock repurchase plan authorizing us to repurchase up to$500.0 million of our outstanding shares of Class A common stock on the open market or in private transactions. During 2020, we repurchased approximately 5.1 million shares of our Class A common stock under the plan for$144.3 million . As ofDecember 31, 2020 ,$325.8 million was available for repurchases under the plan. Our stock repurchases are used primarily to offset dilution from our equity incentive plans and for strategic initiatives. Dividends. We paid quarterly cash dividends of$0.375 per share in March, June, September and December of 2020, for a total of$20.7 million ,$19.4 million ,$19.2 million and$19.1 million , respectively. InFebruary 2021 , our board of directors declared a quarterly cash dividend of$0.38 per share to be paid onMarch 10, 2021 to stockholders of record onFebruary 26, 2021 . Currently, we anticipate that our board of directors will continue to declare quarterly cash dividends and that the cash flows from operations will be sufficient to fund our future dividend payments. However, the continued declaration of dividends is subject to the discretion of our board of directors and will depend upon various factors, including our net earnings, financial condition, cash requirements, future prospects and other relevant factors. Cash from foreign subsidiaries. As ofDecember 31, 2020 and 2019, we held$423.9 million and$344.0 million , respectively, in cash and cash equivalents, including current investments. These amounts include$374.7 million and$277.9 million as ofDecember 31, 2020 and 2019, respectively, held in our operations outside ofthe United States . Substantially all of our non-U.S. cash and cash equivalents are readily convertible intoU.S. dollars or other currencies, subject to procedural or other requirements in certain markets, as well as an indefinite-reinvestment designation, as described below. We typically fund the cash requirements of our operations inthe United States through intercompany dividends, intercompany loans and intercompany charges for products, use of intangible property, and corporate services. However, some markets impose government-approval or other requirements for the repatriation of dividends. For example, in Mainland China, we are unable to repatriate cash from current operations in the form of dividends until we file the necessary statutory financial statements for the relevant period. As ofDecember 31, 2020 and 2019, we had$103.0 million and$76.6 million , respectively, in cash denominated in Chinese RMB. We also have experienced delays in repatriating cash fromArgentina . As ofDecember 31, 2020 and 2019, we had$10.6 million and$2.1 million , respectively, in intercompany receivable with ourArgentina subsidiary. We also have intercompany loan arrangements with some of our markets, including Mainland China, that allow us to access available cash, subject to certain limits in Mainland China and other jurisdictions. We also have drawn on our revolving line of credit to address cash needs until we can repatriate cash from Mainland China or other markets, and we may continue to do so. Except for$60 million of earnings in Mainland China that we designated as indefinitely reinvested during the second quarter of 2018, we currently plan to repatriate undistributed earnings from our non-U.S. operations as necessary, considering the cash needs of our non-U.S. operations and the cash needs of ourU.S. operations for dividends, stock repurchases, capital investments, debt repayment and strategic transactions. Repatriation of non-U.S. earnings is subject to withholding taxes in certain foreign jurisdictions. Accordingly, we have accrued the necessary withholding taxes related to the non-U.S. earnings. We currently believe that existing cash balances, future cash flows from operations and existing lines of credit will be adequate to fund our cash needs on both a short- and long-term basis. The majority of our historical expenses have been variable in nature and as such, a potential reduction in the level of revenue would reduce our cash flow needs. In the event that our current cash balances, future cash flow from operations and current lines of credit are not sufficient to meet our obligations or strategic needs, we would consider raising additional funds in the debt or equity markets or restructuring our current debt obligations. Additionally, we would consider realigning our strategic plans, including a reduction in capital spending, stock repurchases or dividend payments. 52 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures Constant-currency revenue change is a non-GAAP financial measure that removes the impact of fluctuations in foreign-currency exchange rates, thereby facilitating period-to-period comparisons of the Company's performance. It is calculated by translating the current period's revenue at the same average exchange rates in effect during the applicable prior-year period and then comparing that amount to the prior-year period's revenue. We believe that constant-currency revenue change is useful to investors, lenders, and analysts because such information enables them to gauge the impact of foreign-currency fluctuations on our revenue from period to period.
Contingent Liabilities
Please refer to Note 16 to the consolidated financial statements contained in this report for information regarding our contingent liabilities.
Seasonality and Cyclicality
In addition to general economic factors, we are impacted by seasonal factors and trends such as major cultural events and vacation patterns. For example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a negative impact on that quarter. We believe that direct selling is also generally negatively impacted during the third quarter, when many individuals, including our sales force, traditionally take vacations. Prior to making a key product generally available for purchase, we often do one or more introductory offerings of the product, such as a preview of the product to our Sales Leaders or other product introduction or promotion. These offerings may generate significant activity and a high level of purchasing, which can result in a higher-than-normal increase in revenue, Sales Leaders and/or Customers during the quarter and can skew year-over-year and sequential comparisons.
Recent Accounting Pronouncements
A description of new accounting pronouncements is contained in Note 2 to consolidated financial statements contained in this report..
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