Nu Skin Enterprises, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Nu Skin is a global direct-selling company selling personal care and wellness products through its Nu Skin, Pharmanex and ageLOC brands. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $677.0 million | $518.0 million | +31% reported; +25% constant currency |
| Gross profit / margin | $506.5 million / 74.8% | $392.2 million / 75.7% | Margin down 0.9 percentage points |
| Operating income / margin | $62.9 million / 9.3% | $36.6 million / 7.1% | Income +72% |
| Net income | $47.4 million | $19.7 million | +140% |
| Diluted EPS | $0.91 | $0.36 | +153% |
| Operating cash flow | $(18.9) million | $69.0 million | Down $87.9 million |
Gross margin declined as the lower-margin Manufacturing segment made up a larger share of sales; core Nu Skin gross margin was 77.8%, down 0.3 percentage points. Selling expenses were 40.4% of revenue versus 39.8%; general and administrative expenses rose to $169.8 million but fell to 25.1% of revenue from 28.9%. The 2021 effective tax rate was 26.5%, compared with 35.1%, reflecting foreign tax credits and a statute-of-limitations-related tax benefit. Management attributed EPS growth primarily to higher revenue, fewer weighted-average shares after repurchases and the lower tax rate.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $339.1 million at March 31, 2021, down from $402.7 million at year-end. Including current investments, cash and investments totaled $362.7 million, versus $423.9 million.
- Working capital was $339.3 million, down from $360.3 million at December 31, 2020. Operating cash outflow reflected higher inventory, product-launch preparation and payment of prior-quarter commissions and incentives. Inventory rose to $363.4 million from $314.4 million.
- Debt consisted of a $330 million term-loan balance and $60 million drawn on the revolving facility; balance-sheet debt carrying value was $388.1 million after issuance costs. The credit agreement has a $350 million revolver and $400 million term facility. The company reported compliance with its leverage and interest-coverage covenants. Four interest-rate swaps covered $200 million of variable-rate debt.
- Capital expenditures were $19.4 million in Q1. Management estimated 2021 capital expenditures of $70–85 million, including $15–20 million for a Mainland China manufacturing plant; total plant spending was expected to be about $55 million over the next one to two years.
- The company repurchased about 1.0 million shares for $50.4 million and paid $19.3 million in dividends. $275.4 million remained authorized for repurchases. A $0.38-per-share quarterly dividend was declared in May for payment in June.
Material changes and business drivers
- Sales Leaders increased 22% and Customers increased 34% year over year. Management credited digital tools and social commerce, with consumers spending more time shopping and working online. It cautioned that the durability of these trends after the COVID-19 pandemic subsides is uncertain.
- Americas/Pacific revenue doubled and EMEA revenue rose 115%, driven by digital/social selling adoption and favorable currency. Mainland China revenue grew 9% reported but 1% constant currency; South Korea was flat constant currency. Southeast Asia revenue fell 5% constant currency amid pandemic restrictions and logistics challenges.
- Manufacturing revenue increased 69%, supported by demand and prior capacity investments. The ageLOC Boost and Nutricentials Bioadaptive launches generated more than $35 million in combined Q1 revenue.
- Foreign-currency movements benefited consolidated revenue by 6%. Currency changes can materially affect reported results because much of the business is outside the United States.
Outlook, risks and other notable items
- No consolidated revenue or earnings guidance is provided in the supplied filing text. Management expected continued 2021 losses in Grow Tech while it researches controlled-environment agriculture technology and was evaluating strategic alternatives for the business.
- Management said existing cash, expected operating cash flows and credit lines should meet short- and long-term needs, while noting it could reduce capital spending, repurchases or dividends, or seek additional financing if needed. It expects to continue quarterly dividends, subject to board discretion.
- Cash held outside the U.S. was $332.0 million; certain markets impose procedural or other restrictions on repatriation. The company also noted delays in Argentina and $91.7 million of cash denominated in Chinese RMB.
- The company faces risks related to COVID-19 and changing online-shopping trends, foreign exchange, direct-selling and product regulation, tax/customs authorities, and litigation or investigations. Management said existing claims were not expected to have a material adverse effect, but outcomes of certain foreign tax examinations were undetermined.
- In April 2021, Nu Skin acquired MyFavoriteThings, a digital technology company, for $17 million cash, with up to $24 million additional contingent consideration tied to performance targets. The 2020 acquisition of 3i included up to $7 million in contingent consideration.
- Management identified no significant change in critical accounting policies, no material change in internal control over financial reporting, and concluded disclosure controls were effective at quarter-end.
Key facts for investors to verify
- Whether the strong Americas/Pacific and EMEA growth, customer additions and digital/social-commerce adoption persist as pandemic conditions change.
- Inventory levels, working-capital requirements and the path back to positive operating cash flow after Q1’s cash outflow.
- Manufacturing’s contribution to growth and its effect on consolidated gross margin; also progress, losses and strategic alternatives for Grow Tech.
- Debt maturities, revolver usage, covenant headroom, variable-rate exposure and cash availability across foreign markets.
- Delivery and spending for the China manufacturing plant, acquisition performance and contingent payments, and the sustainability of dividends and share repurchases.
- Potential outcomes of foreign tax examinations, regulatory matters and litigation, plus foreign-exchange effects on results.