Nu Skin Enterprises, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Nu Skin develops and sells beauty and wellness products globally through its Nu Skin, Pharmanex and ageLOC brands, alongside its Rhyz Investments businesses. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $641.2 million | $703.3 million | $2,022.2 million | $1,833.7 million |
| Gross profit | $482.2 million | $520.0 million | $1,520.8 million | $1,370.5 million |
| Operating income | $65.4 million | $74.2 million | $213.7 million | $168.9 million |
| Net income | $49.7 million | $56.3 million | $156.5 million | $117.9 million |
| Diluted EPS | $0.97 | $1.08 | $3.03 | $2.23 |
| Gross margin | 75.2% | 73.9% | 75.2% | 74.7% |
- Q3 trends: Revenue fell 9% reported (11% in constant currency); net income declined 12% and diluted EPS declined 10%. Operating margin was approximately 10.2%, versus 10.6% a year earlier. Revenue included favorable foreign-exchange effects of 2%.
- Nine-month trends: Revenue increased 10% reported (6% constant currency); net income rose 33% and diluted EPS rose 36%. Revenue included favorable foreign-exchange effects of 4%.
- Cash flow: Operating cash flow for the first nine months was $32.1 million, down from $284.4 million. Capital expenditures were $50.4 million; cash and cash equivalents declined to $282.4 million from $402.7 million at year-end 2020.
- Liquidity and debt: Working capital was $350.3 million. Cash plus current investments totaled $301.6 million. Debt carrying value was approximately $388.6 million, including $110.0 million current and $278.6 million long-term; the company also had $75.0 million drawn on its $350 million revolver. It reported compliance with debt covenants and planned to refinance its credit agreement within 12 months.
- Capital returns: The company paid $57.3 million in dividends and repurchased $70.4 million of stock in the first nine months. A further quarterly dividend of $0.38 per share was declared in November; $255.4 million remained authorized for repurchases.
Material changes and operating results
- Q3 revenue weakness was concentrated in Mainland China, down 21%, and Southeast Asia/Pacific, down 22%. The company attributed pressure to COVID-19 delta-related restrictions, disrupted promotions and supply constraints. Sales Leaders declined 15% and Customers declined 9% year over year.
- For the first nine months, Americas revenue increased 29% and EMEA increased 46%, while Mainland China declined 3% and Southeast Asia/Pacific declined 6%. Segment comparisons reflect a reporting realignment of the Pacific market into Southeast Asia/Pacific.
- Gross margin improved, supported by product mix and lower freight costs. Q3 general and administrative expense fell year over year, but nine-month expense increased $33.6 million, including higher IT and depreciation costs, distributor events and growth-related costs.
- Rhyz Manufacturing revenue increased 28% for the first nine months; its Q3 segment contribution fell 55%, partly due to approximately $4.8 million of higher inventory reserves. Grow Tech continued to incur losses.
Outlook, commentary, risks and unusual items
- Management gave no clear consolidated revenue or earnings guidance in the supplied filing text. It estimated 2021 capital expenditures of $80–95 million, including $25–30 million during 2021 for a new Mainland China manufacturing plant.
- Management said Beauty Focus Collagen+ and ageLOC Meta were expected to be generally available for purchase in 2022. It expected Grow Tech losses to continue in 2021 and was evaluating strategic alternatives for that business.
- Management linked the sharp decline in operating cash flow mainly to inventory investment to support new-product demand and protect against supply disruptions, and to payment of previously accrued commissions and employee incentives. Inventory was $415.2 million at September 30, up from $314.4 million at December 31, 2020.
- Other income included an $18.1 million unrealized gain on an equity investment; management also cited a $10.7 million loss on asset disposals, primarily related to reducing and optimizing its physical footprint. These items affected comparability and the equity gain was noncash.
- Acquisitions included Mavely in April 2021, with up to $24.0 million of contingent consideration tied to future targets. The company’s overall contingent consideration liability was $12.1 million at quarter-end.
- Risks include pandemic-related disruption, foreign-exchange movements, supply-chain constraints, direct-selling regulation and sales-force claims. In October 2021, the FTC sent the company a notice concerning earnings and other claims; the filing notes potential civil penalties of up to $43,792 per violation and ambiguity in how a violation is defined. Management said litigation and proceedings were not expected to have a material adverse effect, but outcomes of certain foreign tax examinations were undetermined.
Important facts for investors to verify
- Whether sales, Customers and Sales Leaders recover in Mainland China and Southeast Asia/Pacific as restrictions and supply constraints change.
- Whether elevated inventory converts to sales and operating cash flow improves, given the substantial year-to-date cash-flow decline.
- Progress and cost of the China manufacturing plant, and whether 2021 capital spending remains within the stated estimate.
- Terms and execution of the planned credit-agreement refinancing, covenant headroom and use of the revolver.
- Developments in FTC and other regulatory scrutiny, including the notice’s implications for company and sales-force practices.
- Performance of acquired businesses, contingent consideration exposure, and management’s strategic review of Grow Tech.