Nu Skin Enterprises, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Nu Skin is a global direct-selling company focused on personal care products and nutritional supplements, operating across five geographic regions. Financial figures below are in U.S. dollars; dollar amounts are in millions unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $927.6 | $526.2 | $2,160.6 | $1,581.4 |
| Gross profit | $787.8 | $439.4 | $1,819.5 | $1,323.3 |
| Operating income | $168.3 | $82.4 | $365.5 | $251.9 |
| Net income | $110.9 | $54.2 | $239.6 | $162.4 |
| Diluted EPS | $1.80 | $0.87 | $3.91 | $2.55 |
- Revenue increased 76% in Q3 and 37% year to date; foreign exchange reduced reported revenue by 3% in both periods. Net income rose about 105% in Q3 and 48% year to date.
- Gross margin was 84.9% in Q3 and 84.2% year to date, versus 83.5% and 83.7%. Management attributed the improvement to TR90 and Greater China product mix.
- Selling expense was 49.3% of Q3 revenue and 46.6% year to date, up from 44.8% and 44.6%; management cited higher sales-leader compensation and promotional incentives. General and administrative expense fell to 17.5% and 20.7% of revenue, respectively, from 23.1% in both comparable periods.
Regional and product drivers
- Greater China revenue grew 240% in Q3 and 112% year to date. Mainland China grew 407% and 278%, respectively. Q3 Greater China revenue included $157.9 million from the TR90 limited-time offer.
- South Korea revenue increased 75% in Q3; Japan declined 23%, including a substantial negative currency impact. Japan revenue also faced distributor-compliance and promotional constraints.
- Q3 global TR90 revenue was approximately $205 million. Management said product deliveries, returns and possible cannibalization of other products remain under assessment.
- Actives increased 39% and Sales Leaders 101% year over year globally, as reported by management.
Cash flow, liquidity and debt
- Operating cash flow for the first nine months was $484.1 million, versus $239.3 million a year earlier. The increase included a $355.2 million contribution from accrued expenses; inventory growth used $120.2 million of cash.
- Cash and cash equivalents were $553.5 million at September 30, 2013, up from $320.0 million at year-end 2012; cash plus current investments was $565.6 million. Working capital was $304.8 million.
- Capital expenditures were $143.1 million year to date. The company expected about $50 million more in 2013 and said 2014 capital expenditures were expected to be similar to 2013, primarily for facilities, manufacturing, and systems.
- Total debt was approximately $189.2 million, comprising $68.6 million current and $120.6 million long term. A $35 million revolving facility was drawn; a newly arranged $50 million 364-day revolving line was undrawn at quarter-end. Management stated existing cash, operating cash flow and credit lines should meet short- and long-term needs.
- The company paid $52.9 million in dividends and repurchased $90.9 million of shares during the first nine months. A $0.30-per-share quarterly dividend was declared in October; $444.5 million remained available under the repurchase program at quarter-end.
Outlook, risks and unusual items
- No numeric revenue or earnings guidance is provided. Management planned to complete the global TR90 introduction by January 2014, with regional limited-time offers during 2014; further offers were expected in selected regions in Q4 2013 and Q1 2014.
- Rapid growth in Greater China is straining supply chain, staffing, systems and other resources. The company planned to expand manufacturing and triple its China stores and sales-support centers by 2015; execution failures could cause delays, shortages, service problems, added costs or regulatory attention.
- The company is disputing Japanese customs assessments and duties totaling about 4.3 billion yen ($44.5 million). It has recorded disputed deposits or payments as a long-term receivable and believes the assessments are improper. An unsuccessful outcome could result in a non-cash expense for the disputed amount.
- Other material risks include foreign-exchange volatility, direct-selling and product-claim regulation, distributor conduct, scrutiny of weight-loss claims, product supply and quality, and potential product returns or cannibalization. The filing also notes ongoing foreign tax examinations whose outcomes are undetermined.
- Management reported disclosure controls were effective at September 30, 2013 and no material changes to internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether TR90 demand, margins and distributor activity persist after limited-time offers, and the level of returns or cannibalization.
- Whether cash generation remains strong after the unusually large accrued-expense contribution and substantial inventory build.
- Progress in managing Greater China’s supply-chain and operational expansion, and any related regulatory developments.
- Developments in the Japanese customs litigation, including recoverability of the $44.5 million disputed amount.
- Japan sales trends, distributor-compliance actions, and the effect of currency movements on reported results.
- Planned capital spending, debt maturities, and the sustainability of dividends and share repurchases.