Nu Skin Enterprises, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Amounts below are in U.S. dollars unless noted. Nu Skin is a global direct-selling company of personal-care products and nutritional supplements.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $499.1 million | $471.8 million |
| Gross profit / margin | $387.8 million / 77.7% | $334.0 million / 70.8% |
| Operating income / margin | $46.3 million / 9.3% | $8.1 million / 1.7% |
| Net income | $27.5 million | $3.3 million |
| Diluted EPS | $0.51 | $0.06 |
| Cash from operations | $21.3 million | $(2.7) million |
- Revenue rose 6%; foreign exchange reduced reported revenue by approximately 1%. Sales Leaders declined 1% overall and Customers increased 2%.
- Prior-year results included a $31.4 million non-cash Japan customs charge. Excluding it, Q1 2016 gross margin was 77.4%, net income was $23.4 million, and diluted EPS was $0.42. Thus, the reported earnings increase substantially reflects the prior-period charge; adjusted comparisons still improved.
- Selling expense was $209.0 million, or 41.9% of revenue, versus $195.6 million, or 41.5%. General and administrative expense was $132.6 million, or 26.6% of revenue, versus $130.3 million, or 27.6%.
Segments and operating developments
- Mainland China revenue increased 26% to $150.0 million and segment contribution rose to $35.4 million. Sales Leaders and Customers there increased 13% and 24%, respectively; ageLOC Me became generally available in April after a limited March offering.
- South Asia/Pacific revenue increased 10% to $69.8 million. EMEA revenue increased 5% to $34.1 million. Americas revenue was approximately flat at $65.7 million.
- Revenue declined 4% in South Korea, 6% in Japan, and 10% in Hong Kong/Taiwan. Management cited sales-force declines and, in South Korea and Japan, difficult market conditions; Japan also faced a challenging regulatory environment.
- Management changed its segment reporting in Q1, moving to seven geographic reportable segments. Segment contribution is a management measure that excludes specified intercompany charges and corporate costs.
Cash, liquidity and debt
- At March 31, cash and cash equivalents were $335.6 million; including current investments, cash and investments totaled $347.3 million. Working capital was $310.9 million, with a current ratio of approximately 1.79.
- Cash decreased $21.7 million during the quarter. Investing cash outflow was $29.1 million, including $15.9 million of capital expenditures and $12.6 million invested in Treviso. Financing cash outflow was $18.5 million, including $19.0 million of dividends and $6.8 million of share repurchases; the company also borrowed $25.0 million under its revolving facility.
- Balance-sheet debt carrying amounts totaled approximately $428.5 million, including $99.5 million current and $329.0 million long-term. The company reported compliance with its credit-agreement covenants. It had $47.5 million drawn on its revolving facility and $210.0 million principal amount of 4.75% convertible notes due in 2020; the notes’ effective interest rate is approximately 7.1%.
- Management expected cash balances, operating cash flow and credit lines to cover short- and long-term needs. It anticipated approximately $45 million of additional 2017 capital expenditures.
Outlook, contingencies and notable items
- No specific full-year revenue or EPS guidance is provided in the supplied filing text. Management warned of difficult Q2 and Q3 year-over-year comparisons because limited-time offers generated approximately $106 million and $56 million of revenue, respectively, in those quarters of 2016.
- The board declared a $0.36-per-share quarterly dividend in February, paid in March, and declared another $0.36 dividend in May. Management anticipated continued quarterly dividends, subject to board discretion and business conditions.
- In April 2017, Japan’s Tokyo High Court upheld customs assessments related to 2010 imports. The company intends to appeal to Japan’s Supreme Court; appeals for other periods remained pending. The company said the previously recorded $31.4 million charge covered the disputed amount and was non-cash because assessments had already been paid.
- The company purchased a 35% interest in Treviso, LLC, which owns a manufacturing company, for $21.0 million, comprising $12.6 million cash and $8.4 million in company shares, with a possible $1.0 million earnout.
- Key risks include regulation of direct selling and sales-force conduct, market and sales-force retention, foreign-exchange movements, and access to overseas cash. The filing notes Chinese restrictions on intercompany lending had slowed access to cash in that market; $149.2 million was held in Chinese RMB at quarter-end.
- Tax authorities were examining the company in the U.S. and certain foreign jurisdictions; outcomes were not yet determinable. Management did not expect total unrecognized tax benefits to change significantly over the next 12 months. Management stated other litigation outcomes were not likely to materially affect consolidated results.
Most important facts for investors to verify
- Whether Mainland China growth and the ageLOC Me launch sustain revenue and sales-force momentum.
- Whether weakness in South Korea, Japan and Hong Kong/Taiwan continues, and the impact of local regulatory conditions.
- The outcome and financial implications of the Japan customs appeal and remaining assessments for other periods.
- Debt, refinancing and cash-access conditions, particularly China-related restrictions, alongside dividends, repurchases and planned capital spending.
- The effect of 2016 limited-time offers on Q2 and Q3 comparisons; reported earnings comparisons should be assessed against the prior-year customs charge.