ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws and include, but are not limited to, statements of management’s expectations regarding our performance, initiatives, strategies, product introductions and offerings, growth, opportunities and risks; statements of projections regarding future sales, expenses, operating results, taxes and duties, capital expenditures, sources and uses of cash, foreign-currency fluctuations or devaluations, repatriation of undistributed earnings, and other financial items; statements of management’s expectations and beliefs regarding our markets and global economic conditions; statements regarding the payment of future dividends and stock repurchases; statements regarding the outcome of litigation, audits, investigations or other regulatory actions; statements regarding government policies and regulations relating to our industry, including government policies and regulations in Mainland China; accounting estimates and assumptions; statements of belief; and statements of assumptions underlying any of the foregoing. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,” “project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” “may,” “might,” the negative of these words and other similar words. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. We caution and advise readers that these statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. For a summary of these risks, see the risk factors included in our Annual Report on Form 10-K for the 2019 fiscal year and in our subsequent quarterly and other reports, including this Quarterly Report.
The following Management’s Discussion and Analysis should be read in conjunction with our consolidated financial statements and related notes and Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the 2019 fiscal year, and our other reports filed with the Securities and Exchange Commission through the date of this Quarterly Report on Form 10-Q.
Overview
Revenue for the three-month period ended June 30, 2020 decreased 2% to $612.4 million, compared to $623.5 million in the prior-year period, and revenue for the six-month period ended June 30, 2020 decreased 9% to $1.1 billion, compared to $1.2 billion in the prior-year period. Sales Leaders decreased 9% and Customers increased 29% on a year-over-year basis.
The declines in revenue for the three- and six-month periods ended June 30, 2020 were largely driven by a continuation of the decline we experienced toward the second half of 2019 and the impact of COVID-19 on the first quarter of 2020. The decline in Sales Leaders was primarily due to the drop in Sales Leaders in Greater China precipitated in 2019 and was further impacted by the outbreak of COVID-19 and the related government-imposed restrictions and public hesitance regarding in-person gatherings. While it is difficult to project the ongoing impact from COVID-19 for the remainder of the year, during the second quarter, the pandemic particularly impacted our Southeast Asia and South Korea segments. Through our new technology and digital offerings along with effective customer initiatives, we were able to increase our Customers by 29%. During the second quarter, our results were positively impacted by significant growth in our Americas/Pacific and EMEA markets of 38% and 17%, as discussed below. Our East markets’ primary business method is more reliant on in-person meetings, the West, through strong sales leadership was able to adapt to a more digital- and social-focused business, resulting in a different impact from COVID-19. We are optimistic about the second half of 2020, as we remain focused on building Sales Leaders by leveraging our technology enhancements and executing a strong product launch of a new beauty device that we plan to introduce in the fourth quarter. The launch of the ageLOC Boost will follow the same approach as our 2017-2018 launch of ageLOC LumiSpa. We plan to introduce the product in the second half of the year, primarily the fourth quarter, and then continue the launch process for this product across most of our segments during the first half of 2021.
Earnings per share for the second quarter of 2020 decreased 2% to $0.81, compared to $0.83 in the prior-year period. Earnings per share for the first six months of 2020 decreased 28% to $1.15, compared to $1.59 in the prior-year period. The slight decrease in earnings per share for the quarter is primarily driven by the decline in revenue. Increases in freight cost, selling expenses and general and administrative expenses were offset by a lower weighted-average outstanding shares from our stock repurchases and a lower tax rate. The decrease in earnings per share for the six-month period reflects the same factors, along with impacts from the first quarter, when our general and administrative expenses as a percentage of revenue were relatively higher due to the fixed nature of these expenses against our lower first-quarter revenue.
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 three- and six-month periods ended June 30, 2020 and 2019 for each of our reportable segments (U.S. dollars in thousands):
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|
Three Months Ended
June 30,
|
|
|
|
|
|
Constant-
Currency
|
|
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Six Months Ended
June 30,
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|
|
|
|
|
Constant-
Currency
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Change(1)
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|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Change(1)
|
|
Nu Skin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
$
|
146,332
|
|
|
$
|
185,333
|
|
|
|
(21
|
)%
|
|
|
(18
|
)%
|
|
$
|
284,028
|
|
|
$
|
393,821
|
|
|
|
(28
|
)%
|
|
|
(25
|
)%
|
Americas/Pacific
|
|
|
127,919
|
|
|
|
92,841
|
|
|
|
38
|
%
|
|
|
48
|
%
|
|
|
202,492
|
|
|
|
179,297
|
|
|
|
13
|
%
|
|
|
21
|
%
|
South Korea
|
|
|
76,915
|
|
|
|
84,732
|
|
|
|
(9
|
)%
|
|
|
(5
|
)%
|
|
|
152,634
|
|
|
|
168,585
|
|
|
|
(9
|
)%
|
|
|
(5
|
)%
|
Southeast Asia
|
|
|
66,829
|
|
|
|
75,395
|
|
|
|
(11
|
)%
|
|
|
(9
|
)%
|
|
|
136,415
|
|
|
|
147,890
|
|
|
|
(8
|
)%
|
|
|
(6
|
)%
|
Japan
|
|
|
68,291
|
|
|
|
65,251
|
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
129,591
|
|
|
|
127,360
|
|
|
|
2
|
%
|
|
|
—
|
|
EMEA
|
|
|
50,776
|
|
|
|
43,400
|
|
|
|
17
|
%
|
|
|
21
|
%
|
|
|
86,179
|
|
|
|
85,218
|
|
|
|
1
|
%
|
|
|
4
|
%
|
Hong Kong/Taiwan
|
|
|
37,161
|
|
|
|
43,712
|
|
|
|
(15
|
)%
|
|
|
(17
|
)%
|
|
|
72,988
|
|
|
|
84,270
|
|
|
|
(13
|
)%
|
|
|
(15
|
)%
|
Other
|
|
|
(85
|
)
|
|
|
1,249
|
|
|
|
(107
|
)%
|
|
|
(107
|
)%
|
|
|
688
|
|
|
|
(177
|
)
|
|
|
(489
|
)%
|
|
|
(488
|
)%
|
Total Nu Skin
|
|
|
574,138
|
|
|
|
591,913
|
|
|
|
(3
|
)%
|
|
|
—
|
|
|
|
1,065,015
|
|
|
|
1,186,264
|
|
|
|
(10
|
)%
|
|
|
(7
|
)%
|
Manufacturing
|
|
|
37,918
|
|
|
|
31,557
|
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
65,065
|
|
|
|
60,829
|
|
|
|
7
|
%
|
|
|
7
|
%
|
Grow Tech
|
|
|
310
|
|
|
|
30
|
|
|
|
933
|
%
|
|
|
933
|
%
|
|
|
314
|
|
|
|
30
|
|
|
|
947
|
%
|
|
|
947
|
%
|
Total
|
|
$
|
612,366
|
|
|
$
|
623,500
|
|
|
|
(2
|
)%
|
|
|
1
|
%
|
|
$
|
1,130,394
|
|
|
$
|
1,247,123
|
|
|
|
(9
|
)%
|
|
|
(7
|
)%
|
(1)
|
Constant-currency revenue change is a non-GAAP financial measure. See “Non-GAAP Financial Measures,” below.
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The following table sets forth segment contribution for the three- and six-month periods ended June 30, 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 manage for their respective segments. For additional information regarding our segments and the calculation of segment contribution, see Note 9 to the consolidated financial statements contained in this report.
|
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Three Months Ended
June 30,
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|
|
|
|
|
Six Months Ended
June 30,
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|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
Nu Skin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
$
|
43,668
|
|
|
$
|
51,087
|
|
|
|
(15
|
)%
|
|
$
|
81,055
|
|
|
$
|
110,254
|
|
|
|
(26
|
)%
|
Americas/Pacific
|
|
|
24,343
|
|
|
|
16,420
|
|
|
|
48
|
%
|
|
|
34,928
|
|
|
|
28,439
|
|
|
|
23
|
%
|
South Korea
|
|
|
24,090
|
|
|
|
25,979
|
|
|
|
(7
|
)%
|
|
|
48,189
|
|
|
|
51,647
|
|
|
|
(7
|
)%
|
Southeast Asia
|
|
|
16,977
|
|
|
|
20,840
|
|
|
|
(19
|
)%
|
|
|
33,695
|
|
|
|
38,832
|
|
|
|
(13
|
)%
|
Japan
|
|
|
16,455
|
|
|
|
15,823
|
|
|
|
4
|
%
|
|
|
31,047
|
|
|
|
29,929
|
|
|
|
4
|
%
|
EMEA
|
|
|
3,342
|
|
|
|
3,234
|
|
|
|
3
|
%
|
|
|
3,973
|
|
|
|
4,585
|
|
|
|
(13
|
)%
|
Hong Kong/Taiwan
|
|
|
6,839
|
|
|
|
9,217
|
|
|
|
(26
|
)%
|
|
|
13,777
|
|
|
|
16,691
|
|
|
|
(17
|
)%
|
Total Nu Skin
|
|
|
135,714
|
|
|
|
142,600
|
|
|
|
(5
|
)%
|
|
|
246,664
|
|
|
|
280,377
|
|
|
|
(12
|
)%
|
Manufacturing
|
|
|
5,402
|
|
|
|
3,375
|
|
|
|
60
|
%
|
|
|
8,251
|
|
|
|
7,021
|
|
|
|
18
|
%
|
Grow Tech
|
|
|
(5,487
|
)
|
|
|
(4,582
|
)
|
|
|
(20
|
)%
|
|
|
(12,337
|
)
|
|
|
(8,211
|
)
|
|
|
(50
|
)%
|
The following table provides information concerning the number of Customers and Sales Leaders as of June 30, 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 independent distributors, and sales employees and independent marketers in Mainland China, who achieve certain qualification requirements. Our Velocity sales compensation program enhancements, which we introduced in all of our markets outside Mainland China from the fourth quarter of 2017 through the first half of 2019, included adjustments to the requirements for qualifying for and maintaining Sales Leader status. These adjustments have impacted the number of independent distributors who achieve such requirements under Velocity. For example, the sales volume necessary to achieve initial qualification has been increased in some markets, financial rewards have been increased for higher monthly sales productivity, and qualification requirements to maintain and advance status have been modified. The enhanced program also provides some flexibility to remain a Sales Leader with a lower sales volume for a short time. Mainland China operates under a different business model and was not impacted by these changes.
|
|
As of
June 30, 2020
|
|
|
As of
June 30, 2019
|
|
|
% Increase (Decrease)
|
|
|
|
Customers
|
|
|
Sales Leaders
|
|
|
Customers
|
|
|
Sales Leaders
|
|
|
Customers
|
|
|
Sales Leaders
|
|
Mainland China
|
|
|
321,946
|
|
|
|
17,104
|
|
|
|
226,877
|
|
|
|
24,336
|
|
|
|
42
|
%
|
|
|
(30
|
)%
|
Americas/Pacific
|
|
|
424,236
|
|
|
|
10,787
|
|
|
|
253,684
|
|
|
|
8,161
|
|
|
|
67
|
%
|
|
|
32
|
%
|
South Korea
|
|
|
159,926
|
|
|
|
6,881
|
|
|
|
180,365
|
|
|
|
7,239
|
|
|
|
(11
|
)%
|
|
|
(5
|
)%
|
Southeast Asia
|
|
|
155,822
|
|
|
|
6,790
|
|
|
|
137,450
|
|
|
|
7,417
|
|
|
|
13
|
%
|
|
|
(8
|
)%
|
Japan
|
|
|
125,332
|
|
|
|
6,011
|
|
|
|
127,900
|
|
|
|
5,931
|
|
|
|
(2
|
)%
|
|
|
1
|
%
|
EMEA
|
|
|
247,057
|
|
|
|
5,120
|
|
|
|
164,055
|
|
|
|
4,256
|
|
|
|
51
|
%
|
|
|
20
|
%
|
Hong Kong/Taiwan
|
|
|
65,581
|
|
|
|
3,343
|
|
|
|
70,089
|
|
|
|
4,223
|
|
|
|
(6
|
)%
|
|
|
(21
|
)%
|
Total
|
|
|
1,499,900
|
|
|
|
56,036
|
|
|
|
1,160,420
|
|
|
|
61,563
|
|
|
|
29
|
%
|
|
|
(9
|
)%
|
Following is a narrative discussion of our results in each segment, which supplements the tables above.
Mainland China. During the second quarter of 2020, we began to see sequential stabilization following the 2019 contraction of our business in the Mainland China market, compounded by the impact of COVID-19 and the related public-health restrictions, which severely limited in-person meetings in the first quarter of 2020. As a result of the foregoing issues, revenue and Sales Leaders declined for the second quarter and first six months of 2020 on a year-over-year basis, but had a slight uptick on a sequential basis. Our reported revenue also reflects a negative impact of 3% from foreign-currency fluctuations for both the second quarter and first half of 2020. Our Customers increased 42% from successful customer initiatives, including the second quarter launch of a new loyalty program.
The year-over-year decrease in segment contribution for the second quarter is primarily attributable to the decline in revenue, partially offset by a 2.0 percentage point increase in gross margin, a 2.8 percentage point decrease in selling expense as a percentage of revenue and a $2.3 million decrease in general and administrative expense. The decrease in segment contribution for the first half of 2020 is attributable to the decline in revenue, with improvements in gross margin and decreased selling expenses.
Americas/Pacific. Successful digital tools and strong social sharing in the market contributed to a 38% increase in revenue for the second quarter and a 13% increase for the first half of 2020. The social and digital transformation 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. This has led to a significant increase in Customers as well as Sales Leaders. As disclosed above, our Customer number includes only customers who purchase directly from the Company. A portion of the increase in Customers may reflect a shift from reselling to assisting customers purchase products directly from the Company. Our reported revenue also reflects a negative impact of 10% and 8% from foreign-currency fluctuations for the second quarter and first half of 2020, respectively, primarily due to the weakening Argentina peso. In our U.S. market, we are planning to preview our new Nutricentials Bioadaptive Skin Care product line in the fourth quarter of 2020 and to make it generally available for purchase in the first quarter of 2021. In our U.S. market, we plan to introduce and launch the ageLOC Boost during 2021.
The year-over-year increase in segment contribution for the second quarter and first half of 2020 primarily reflects the increase in revenue, partially offset by a lower gross margin, partially attributable to product mix due to a higher shift to devices along with an increase in freight. Additionally, general and administrative expenses increased for the second quarter of 2020, due to higher labor cost, partially offset by a decrease in sales force events due to COVID-19 restrictions.
South Korea. Our business in the South Korea segment continued to be challenged in the second quarter and first half of 2020 from the COVID-19 outbreak. As previously disclosed, we continue to anticipate a longer negative impact from COVID in this market. Our reported revenue also reflects a negative impact of 4% from foreign-currency fluctuations for both the second quarter and first half of 2020.
The decrease in segment contribution for the three- and six-month periods ended June 30, 2020 is primarily attributable to the decrease in revenue, partially offset by a slight improvement in gross margin.
Southeast Asia. Our Southeast Asia segment continued to be challenged in the second quarter and first half of 2020 from the COVID-19 outbreak. We continue to anticipate a longer negative impact from COVID-19 as most of the Southeast Asia markets remain in lockdown status. The increase in Customers was primarily driven by successful customer initiatives.
For the three months ended June 30, 2020, the decrease in segment contribution is largely attributed to the decline in revenue, along with a 2.3 percentage point decrease in gross margin. The decrease in segment contribution for the first half of 2020 is primarily from the decline in revenue.
Japan. Our Japan segment continues to show signs of stabilization, resulting in 2% constant-currency revenue growth for the second quarter of 2020, with a 3% benefit from favorable foreign-currency fluctuations.
For the second quarter of 2020, segment contribution increased due to improved revenue partially offset by a slight increase in selling expenses. For the first half of 2020, segment contribution increased from successful general and administrative cost-saving measures and improved revenue.
EMEA. Our EMEA segment had a strong quarter, benefiting from our technology offerings enabling strong social sharing, resulting in increases in revenue, Sales Leaders and Customers. Similar to our Americas/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. Our reported revenue also reflects a negative impact of 4% and 3% from foreign-currency fluctuations for the second quarter and first half of 2020, respectively. In our EMEA segment, we are planning to preview our new Nutricentials Bioadaptive Skin Care product line in the fourth quarter of 2020 and to make it generally available for purchase in the first quarter of 2021. In our EMEA segment, we plan to introduce and launch the ageLOC Boost during 2021.
The changes in segment contribution for both periods presented, were due to lower gross margin from higher freight cost and increases in selling expenses driven by the rapid growth in the business.
Hong Kong/Taiwan. Our Hong Kong/Taiwan segment continues to be challenged from the ongoing decline from 2019 and further impacted by the social incidents in Hong Kong and COVD-19, with declines in revenue, Sales Leaders and Customers for both periods presented.
The decrease in segment contribution for the second quarter and first half of 2020 resulted primarily from the decline in revenue.
Manufacturing. Despite the continued supply chain challenges in obtaining certain ingredients and packaging materials during the second quarter, we were able to generate a 20% year-over-year increase in revenue for the second quarter of 2020 and a 7% increase for the six-month period ended June 30, 2020. Our previous investment in additional capacity has allowed our manufacturing companies to continue to increase revenue. These companies provide products and services both to our Nu Skin business and to external customers. Reported revenue includes only the revenue generated by sales to external customers.
The $2.0 million and $1.2 million improvements in segment contribution for the three- and six-month periods ended June 30, 2020, respectively, reflect revenue increases and improved gross margin.
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 2020 from this segment as we continue to research and refine the technology.
Consolidated Results
Revenue
Revenue for the three-month period ended June 30, 2020 decreased 2% to $612.4 million, compared to $623.5 million in the prior-year period. Revenue for the six-month period ended June 30, 2020 decreased 9% to $1.1 billion, compared to $1.2 billion in the prior-year period. For a discussion and analysis of these decreases in revenue, see “Overview” and “Segment Results,” above.
Gross profit
Gross profit as a percentage of revenue was 74.8% for the second quarter of 2020, compared to 75.3% for the prior-year period, and 75.2% for the first six months of 2020, compared to 75.9% for the prior-year period. Gross profit as a percentage of revenue for core Nu Skin decreased 0.2 percentage points to 77.6% for the second quarter of 2020 and decreased 0.4 percentage points to 77.8% for the first six months of 2020. Our gross profit was negatively impacted by higher freight cost during the second quarter and first half of 2020 due to express orders to meet higher demand as well as COVID-19.
Selling expenses
Selling expenses as a percentage of revenue were 40.6% for the second quarter of 2020, compared to 39.4% for the prior-year period, and 40.2% for the first six months of 2020, compared to 39.7% for the prior-year period. Selling expenses for our core Nu 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. For the second quarter and first six months of 2020, core Nu Skin selling expenses as a percentage of revenue increased 1.8 percentage points and increased 0.9 percentage points to 43.3% and 42.7%, respectively. The increase in core Nu Skin selling expenses is partially driven by the strong sequential revenue growth, which resulted in Sales Leaders achieving larger volumes, resulting in a higher commission percentage. This was partially offset by the impact of the increase in revenue from our Manufacturing segment, which does not carry significant selling expenses and therefore lowered consolidated selling expenses.
General and administrative expenses
General and administrative expenses as a percentage of revenue increased to 24.7% for the second quarter of 2020, from 24.0% for the prior-year period, and to 26.6% for the first six months of 2020, from 24.7% for the prior-year period. General and administrative expenses increased to $151.6 million in the second quarter of 2020 and decreased to $301.2 million in the first six months of 2020, compared to $149.4 million and $308.0 million in the respective prior-year periods. General and administrative expenses remained largely flat for the presented periods with an increase in labor expenses and decreases in travel and sales force events as a result of the COVID-19 restrictions that were in place.
Other income (expense), net
Other income (expense), net was $1.6 million for the second quarter of 2020 compared to ($3.3) million for the prior-year period, and ($4.6) million for the first six months of 2020 compared to ($6.2) million for the prior-year period. The decrease in expense for the three- and six-month periods ended June 30, 2020 primarily relates to a lower interest expense due to a decreased interest rate. Additionally, for the three-month period ended June 30, 2020 we benefited from foreign-currency fluctuations.
Provision for income taxes
Provision for income taxes for the three- and six-month periods of 2020 was $17.8 million and $28.5 million, compared to $24.5 million and $47.3 million for the prior-year periods. The effective tax rates for the three- and six-month periods were 29.8% and 31.6% of pre-tax income compared to 34.6% and 34.6% in the prior-year periods. The decrease in the effective tax rate for the second quarter of 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 the U.S. income taxes.
On March 27, 2020, the CARES Act was signed into law, which, among other things, includes provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. We have assessed the impact of this new legislation and, at present, do not expect it to have a material impact on our 2020 effective tax rate.
Net income
As a result of the foregoing factors, net income for the second quarter of 2020 was $41.9 million, compared to $46.3 million in the prior-year period. Net income for the first six months of 2020 was $61.6 million, compared to $89.4 million for the first six months of 2019.
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. In the first six months of 2020, we generated $166.1 million in cash from operations, compared to $74.5 million in cash from operations during the prior-year period. The increase in cash flow from operations reflects continued improvements in inventory management and other cost saving initiatives implemented by our markets, along with higher payout of accruals in the first quarter of 2019, mainly attributable to severance pay-out, along with a decrease in cash outflows in 2020, due to higher commission accrual that will be paid out in the third quarter of 2020. Cash and cash equivalents, including current investments, as of June 30, 2020 and December 31, 2019 were $386.3 million and $344.0 million, respectively, driven by the positive cash flow from operations, partially offset by dividend payments and stock repurchases.
Working capital. As of June 30, 2020, working capital was $301.2 million, compared to $383.4 million as of December 31, 2019. The decrease in working capital is primarily attributable to a $65.0 million increase in borrowings under our revolving credit facility during the first quarter to fund our stock repurchases and other expenses for operations. The decline in working capital also reflects a decrease in inventory as we continue to optimize our inventory balance, an increase in accrued commission from the increases sales during the end of the quarter, deferred revenue and accrued bonus, partially offset by the increase in cash and accounts receivable from timing of sales.
Capital expenditures. Capital expenditures for the first six months of 2020 were $28.7 million. Our 2020 capital expenditures include the following:
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the expansion and upgrade of our facilities and equipment;
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purchases and expenditures for computer systems and equipment, software, and application development; and
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purchases of equipment and development of our technology in our Grow Tech initiative.
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We estimate that capital expenditures for the uses listed above will total approximately $65-70 million for 2020. In addition, we are also in the building phase for a new manufacturing plant in Mainland China. To date we have spent approximately $13.3 million and expect that our expenditures for this project will total approximately $55 million over the next 2-3 years, including approximately $15-18 million during 2020.
Credit Agreement. In April 2018, we entered into a Credit Agreement (the “Credit Agreement”) with various financial institutions as lenders and Bank 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 the Previous Credit Agreement, and the outstanding balance on the Convertible Notes. 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 of June 30, 2020 and December 31, 2019 respectively, we had outstanding borrowings of $65.0 million and zero under our revolving credit facility, and $352.5 and $365.0 remaining balance on our term loan facility. The carrying value of the debt also reflects debt issuance costs of ($2.6) million and ($3.0) million as of June 30, 2020 and December 31, 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.
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 the first half of 2020, we repurchased approximately 4.4 million shares of our Class A common stock under the plan for $107.4 million. As of June 30, 2020, $362.8 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. In February and April 2020, our board of directors declared quarterly cash dividends of $0.375 per share. These quarterly cash dividends of $20.7 million and $19.4 million were paid on March 11, 2020 and June 10, 2020 to stockholders of record on February 28, 2020 and May 29, 2020. In July 2020, our board of directors declared a quarterly cash dividend of $0.375 per share to be paid on September 9, 2020 to stockholders of record on August 28, 2020. 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 of June 30, 2020 and December 31, 2019, we held $386.3 million and $344.0 million, respectively, in cash and cash equivalents, including current investments. These amounts include $312.8 million and $277.9 million as of June 30, 2020 and December 31, 2019, respectively, held in our operations outside of the U.S. Substantially all of our non-U.S. cash and cash equivalents are readily convertible into U.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 in the U.S. 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 of June 30, 2020, we had $88.2 million in cash denominated in Chinese RMB. 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 $60.0 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 our U.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.
Contingent Liabilities
Please refer to Note 10 to the consolidated financial statements contained in this Quarterly Report for information regarding our contingent liabilities.
Critical Accounting Policies
There were no significant changes in our critical accounting policies during the second quarter of 2020.
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 may do one or more introductory offerings of the product, such as a preview of the product to our Sales Leaders, a limited-time offer, 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.
Currency Risk and Exchange Rate Information
A majority of our revenue and many of our expenses are recognized outside of the United States, except for inventory purchases, a significant portion of which are primarily transacted in U.S. dollars from vendors in the United States. The local currency of each of our Subsidiaries’ primary markets is considered the functional currency with the exception of our Asia product-distribution subsidiary in Singapore and, as discussed below, our subsidiary in Argentina. All revenue and expenses are translated at weighted-average exchange rates for the periods reported. Therefore, our reported revenue and earnings will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. These impacts may be significant because a large portion of our business is derived from outside of the United States. Given the uncertainty of exchange rate fluctuations, it is difficult to predict the effect of these fluctuations on our future business, product pricing and results of operations or financial condition.
In the second quarter of 2018, published inflation indices indicated that the three-year cumulative inflation in Argentina exceeded 100 percent, and as of July 1, 2018, we elected to adopt highly inflationary accounting for our subsidiary in Argentina. Under highly inflationary accounting, the functional currency for our subsidiary in Argentina became the U.S. dollar, and the income statement and balance sheet for this subsidiary have been measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on peso-denominated monetary assets and liabilities has been reflected in earnings in Other income (expense), net and was not material. As of June 30, 2020, our subsidiary in Argentina had a small net peso monetary position. Net sales of our subsidiary in Argentina were less than 2% of our consolidated net sales for the six-month periods ended June 30, 2020 and 2019.
We may seek to reduce our exposure to fluctuations in foreign currency exchange rates through the use of foreign currency exchange contracts and through intercompany loans of foreign currency. We do not use derivative financial instruments for trading or speculative purposes. We regularly monitor our foreign currency risks and periodically take measures to reduce the impact of foreign exchange fluctuations on our operating results. As of June 30, 2020 and 2019, we did not hold non-designated mark-to-market forward derivative contracts to hedge foreign denominated intercompany positions or third party foreign debt. As of June 30, 2020, and 2019 we did not hold any forward contracts designated as foreign currency cash flow hedges. We continue to evaluate our foreign currency hedging policy.
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.
Available Information
Our website address is www.nuskin.com. We make available, free of charge on our Investor Relations website, ir.nuskin.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
We also use our Investor Relations website, ir.nuskin.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, Securities and Exchange Commission filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.