Nu Skin Enterprises, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Nu Skin is a global direct-selling company of personal care products and nutritional supplements. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $704.2 | $550.1 | $1,320.4 | $1,049.2 |
| Gross profit | $535.6 | $428.6 | $1,005.6 | $816.4 |
| Operating income | $82.8 | $64.7 | $141.8 | $111.0 |
| Net income | $51.0 | $42.0 | $86.5 | $69.5 |
| Diluted EPS | $0.90 | $0.77 | $1.53 | $1.28 |
| Gross margin | 76.1% | 77.9% | 76.2% | 77.8% |
- Revenue grew 28% in Q2 and 26% in the first half; constant-currency growth was 24% and 21%, respectively. Reported growth benefited from currency (4% in Q2; 5% first half) and acquired businesses (4% in each period).
- Q2 diluted EPS rose 17%; first-half diluted EPS rose 20%. Q2 earnings growth reflected higher revenue, partly offset by an $8.4 million foreign-currency charge.
- Gross margin declined year over year, principally because the acquired manufacturing and packaging businesses have lower margins; management said core-business gross margin was relatively stable. Selling expenses fell as a share of revenue, while Q2 G&A rose to 25.6% of revenue from 24.6%.
- First-half operating cash flow was $51.9 million, down from $84.0 million. Investing cash use was $58.2 million, including $28.4 million of capital expenditures and $28.3 million of acquisition spending. Financing cash use was $9.0 million. Cash and cash equivalents ended at $402.0 million, down from $426.4 million at year-end 2017.
- At June 30, cash plus current investments totaled $410.2 million; working capital was $368.0 million. Balance-sheet debt was $468.0 million, including $97.5 million current and $370.5 million long-term. The new credit agreement included a $400 million term loan and $350 million revolving facility; the company reported covenant compliance.
Changes, business drivers and management commentary
- Mainland China revenue rose 43% in Q2, with strong LumiSpa demand and a 48% increase in Sales Leaders. Southeast Asia revenue grew 31%; Americas/Pacific 25%; Hong Kong/Taiwan 21%; and EMEA 15%. Japan revenue declined 1% and South Korea grew 5%, with much of South Korea’s increase attributed to currency.
- Company-wide Customers increased 8% and Sales Leaders 21% year over year. Management cited ageLOC LumiSpa, social-selling initiatives and rollout of the Velocity compensation program as growth drivers.
- Management said the South Korean business remained challenged by political conditions and online competition; Japan faced a soft direct-selling market and a challenging regulatory environment. Mainland China sales-force compensation was expected to rise after its next quarterly evaluation, following strong performance.
- Three first-quarter acquisitions brought manufacturing and packaging operations in-house. Acquired businesses generated $22.7 million of Q2 and $39.9 million of first-half external revenue. They added $4.7 million of acquisition-related intangible amortization in the first half; management expected approximately $2–3 million per quarter for the remainder of 2018.
Outlook, risks and unusual items
- Management estimated approximately $45 million of capital expenditures for the remainder of 2018, plus approximately $15–20 million for a planned Mainland China manufacturing plant, subject to approvals. It believed cash, operating cash flows and credit lines would meet short- and long-term needs.
- The board declared a $0.365-per-share quarterly dividend in July, payable September 12, 2018. A new $500 million share-repurchase authorization was approved in July, replacing the prior plan.
- Q2 other expense included an $8.4 million foreign-currency loss, chiefly related to the U.S. dollar strengthening against the Chinese yuan and Argentine peso. First-half results also included a $13.6 million noncash gain on step acquisitions, a $7.2 million debt-extinguishment charge following convertible-note conversion, and a $5.8 million first-quarter tax charge primarily related to an Indonesia tax audit.
- Effective July 1, 2018, Argentina was treated as a highly inflationary economy, with the U.S. dollar becoming the subsidiary’s functional currency. Argentina represented less than 2% of first-half revenue and less than 1% of assets.
- Currency movements, trade disputes and tariffs, foreign-market regulation, tax examinations, and direct-selling compliance remain risks. The company said U.S.–China trade measures had not materially affected operations to date but could do so if they continue or intensify. Litigation outcomes were not expected by management to materially affect consolidated results; the Japan customs matter was closed after the Supreme Court declined review, with the full $31.4 million assessment previously charged and paid.
- Adoption of revenue-recognition Topic 606 reduced opening retained earnings by $11.2 million and reduced reported Q2 and first-half revenue by $0.6 million and $1.2 million, respectively. Q2 and first-half effective tax rates were 28.8% and 34.4%.
Key facts for investors to verify
- How much reported growth is recurring and organic versus foreign-exchange effects, acquired-company revenue, product-launch activity and conventions.
- Whether LumiSpa demand and the Velocity rollout sustain customer and Sales Leader growth, particularly in China, while South Korea and Japan remain weaker.
- Whether operating cash flow recovers as inventory and year-end accrual payments normalize, and how acquisition integration affects margins and cash needs.
- Debt balances, variable interest-rate exposure, covenant headroom, and the planned China plant’s final budget and approvals.
- Effects of Argentina’s highly inflationary accounting, currency volatility, trade measures and outstanding tax examinations on future earnings and cash flow.
- Whether dividends and the new repurchase plan remain supportable alongside capital spending, debt service and strategic investments.