Nu Skin Enterprises, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; compared with Q1 2010. Nu Skin is a global direct-selling company focused on personal care and nutritional products. Figures below are in U.S. dollars unless stated otherwise.
Financial results
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Revenue | $395.8 million | $364.1 million | Up 9% reported; currency contributed about 5% |
| Gross profit | $295.2 million | $299.3 million | GAAP gross margin 74.6%, versus 82.2% |
| Gross profit excluding Japan customs charge | $327.9 million | Not applicable | Non-GAAP margin 82.8% |
| Operating income | $24.9 million | $46.1 million | Down 46% |
| Net income | $15.3 million | $31.0 million | Down 51%; Q1 2011 includes the Japan customs charge |
| Diluted EPS | $0.24 | $0.48 | Management reported non-GAAP diluted EPS of $0.56 excluding the customs charge |
| Cash from operations | $42.3 million | $39.0 million | Up from prior year |
The $32.8 million Japan customs charge was recorded in cost of sales and was non-cash in Q1 because the assessments had previously been paid under protest. Management’s adjusted net income was $35.8 million after a stated $12.3 million tax effect; these adjusted figures are non-GAAP.
Regional and business trends
- Greater China revenue rose 19% to $68.6 million, including 52% reported growth in Mainland China. South Asia/Pacific rose 41% to $49.9 million, and Europe rose 11% to $42.0 million.
- North Asia increased 5% to $179.4 million, but Japan revenue declined 7% in local currency. The Americas fell 10% to $55.9 million, including an 11% decline in the United States.
- Pharmanex revenue rose to $176.2 million from $138.1 million; Nu Skin product revenue declined to $217.0 million from $223.3 million. Active distributors globally increased 4%, and executive distributors increased 9%.
- Selling expenses were 42.7% of revenue, versus 42.4%; general and administrative expenses were 25.6%, versus 27.2%.
Cash, liquidity, and debt
- Cash and equivalents were $215.9 million at March 31, down from $230.3 million at December 31, 2010. Working capital was $225.7 million.
- Total debt was approximately $151.0 million, including $27.6 million current and $123.4 million long-term, compared with approximately $160.9 million at year-end. The company reported no borrowings on its $25 million revolving facility.
- Q1 investing cash use was $6.5 million, primarily capital expenditures. Financing cash use was $51.4 million, including $22.0 million of share repurchases, $17.0 million repayment of related-party debt, $8.1 million of debt payments, and $8.4 million of dividends.
- Management said existing cash, operating cash flows, and credit lines should meet short- and long-term needs. The quarterly dividend was $0.135 per share.
Outlook, contingencies, and risks
- Management forecast 2011 capital expenditures of approximately $45–$50 million and expected foreign-exchange movements to have a slightly positive effect on reported revenue. No specific full-year revenue or earnings guidance is provided in the filing.
- Management estimated the Japan earthquake and related disruption could reduce Japan sales by about 5%, or $25 million, in 2011. It expected U.S. softness in Q2 and Q3, followed by growth in Q4 around the October global convention. New ageLOC nutritional and personal care products were planned for that convention.
- The company appealed the Tokyo District Court decision upholding the $32.8 million customs assessment for 2002–2005; it anticipated a decision in the second half of 2012. A separate Japan customs dispute involved $42.5 million of disputed assessments as of March 31, increasing about $3.5 million per quarter. A further $8.2 million assessment received in March was paid under protest in April. If unsuccessful, the company may have to expense disputed amounts.
- Material risks include ongoing Japan disruption and customs disputes, foreign-currency exposure, regulatory scrutiny of direct selling in Japan and China, distributor retention, product and supply-chain issues, and tax examinations. The company was under IRS examination for 2005–2009; it said unrecognized tax benefits could change by approximately $8–$11 million within 12 months.
- Management stated disclosure controls were effective as of March 31, 2011, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Progress and potential financial impact of both Japan customs disputes, including the separate disputed amounts and appeal outcomes.
- Whether Japan recovery and earthquake-related disruption track management’s estimated $25 million sales impact.
- Continuation of Mainland China and South Asia/Pacific growth, alongside weakness in the United States and Japan.
- Cash generation and liquidity after planned capital spending, dividends, debt service, and repurchases.
- How reported earnings compare with the company’s non-GAAP results excluding the customs charge.