Nu Skin Enterprises, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated financial statements; amounts below are in U.S. dollars. Nu Skin is a global direct-selling company offering personal-care and wellness products, with seven geographic Nu Skin segments plus Manufacturing and Grow Tech.
Financial performance and liquidity
- Revenue: $518.0 million, down 17% year over year (15% lower at constant currency). Foreign exchange reduced revenue by 2%. Mainland China revenue fell 34% reported; it was the largest driver of the overall decline.
- Profitability: Gross profit was $392.2 million, down from $477.0 million. Gross margin was 75.7%, versus 76.5%; core Nu Skin gross margin declined 0.6 percentage points to 78.1%. Operating income was $36.6 million versus $68.7 million. Net income was $19.7 million versus $43.0 million; diluted EPS was $0.36 versus $0.77.
- Expenses and tax: Selling expense was $206.0 million (39.8% of revenue, versus 40.0%). G&A expense declined $9.0 million to $149.6 million, but rose to 28.9% of revenue from 25.4% as revenue fell. The effective tax rate was 35.1%, versus 34.7%.
- Cash flow: Operating cash flow was $69.0 million, compared with an $8.2 million use in Q1 2019. Capital expenditures were $19.4 million; operating cash flow less capital expenditures was approximately $49.6 million. Cash and cash equivalents were $352.6 million at quarter-end; cash plus current investments was $361.7 million.
- Liquidity and debt: Working capital was $309.5 million, down from $383.4 million at December 31, 2019. Gross borrowings were $425.0 million: $360.0 million under the term loan and $65.0 million under the revolver. The company reported compliance with its debt covenants at March 31. On April 24, it drew another $50 million, bringing revolver borrowings to $115 million.
- Balance sheet and capital returns: Total assets were $1.746 billion and total liabilities were $945.8 million. The company repurchased 2.6 million shares for $60.9 million and paid $20.7 million in dividends. A quarterly dividend of $0.375 per share was declared in April for payment in June.
Material changes and business drivers
- Sales Leaders fell 22% year over year and Customers fell 5%. Management attributed results to COVID-19 restrictions and public hesitance affecting in-person selling, meetings, travel and walk-in locations, as well as product sourcing and shipping disruptions in some markets.
- Mainland China revenue decreased 34% and segment contribution fell 37%, reflecting the market contraction following 2019 regulatory and media scrutiny and further COVID-related restrictions. Mainland China Sales Leaders declined 40%.
- Revenue declined across the other principal geographic segments as well. Japan segment contribution increased 3% despite lower revenue, which management attributed to cost savings. Grow Tech’s segment loss widened to $6.9 million from $3.6 million.
- Other expense increased to $6.2 million from $2.8 million, primarily because of higher foreign-currency and asset-disposal losses, partly offset by lower interest expense.
- Q1 2019 included no comparable share repurchases beyond approximately $0.8 million; Q1 2020 repurchases were $60.9 million. Foreign-currency translation reduced Q1 2020 comprehensive income by $15.0 million.
Outlook, risks and contingencies
- Management expected COVID-19’s negative effects to continue through 2020, particularly in Q2, while expressing optimism about the second half based on technology-enabled selling and a planned new beauty-device launch.
- Estimated 2020 capital expenditures were $65–70 million. A new Mainland China manufacturing plant was expected to require approximately $55 million over two to three years, including $15–18 million in 2020.
- Management believed cash, operating cash flows and existing credit lines would meet short- and long-term needs, while noting it could reduce capital spending, share repurchases or dividends if needed. Future dividends remain subject to board discretion.
- The filing warns that a deterioration in results could affect covenant compliance and debt-service capacity. Supply-chain interruptions, foreign-exchange movements, regulatory scrutiny of direct selling and product or earnings claims, and potential impairment or inventory recoverability estimates are also risks.
- A Grow Tech-related consultant claims a 50% ownership interest and seeks damages exceeding $250 million. The company disputes the claims and intends to defend itself. Management stated that other litigation, investigations and contingencies were not expected to have a material adverse effect; outcomes of certain foreign tax examinations were undetermined.
Key facts for investors to verify
- Whether revenue, Sales Leader counts and segment contribution stabilize after COVID-related disruptions, especially in Mainland China.
- Whether the planned second-half beauty-device launch and digital selling initiatives support the stated recovery outlook.
- Cash generation, inventory levels, capital spending and the effect of additional revolver borrowing on liquidity and covenant headroom.
- Whether the consultant litigation, foreign tax examinations, or COVID-related asset and inventory assessments result in material charges or obligations.
- Whether repurchases and dividends remain consistent with cash needs and the company’s stated financing priorities.