Nu Skin Enterprises, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. Nu Skin is a direct-selling company operating in 53 markets, selling personal-care products under Nu Skin and nutritional supplements under Pharmanex, including ageLOC products. Approximately 89% of 2012 revenue was generated outside the United States.
Key financial results
| Metric | 2012 | 2011 | Change or context |
|---|---|---|---|
| Revenue | $2,169.7 million | $1,744.0 million | Up 24% |
| Gross profit / margin | $1,816.5 million / 83.7% | $1,421.4 million / 81.5% | 2011 margin was 83.4% excluding the Japan customs charge |
| Operating income / margin | $340.8 million / 15.7% | $233.7 million / 13.4% | Improved year over year |
| Net income | $221.6 million | $153.3 million | 2011 was $173.8 million excluding the after-tax Japan customs charge |
| Diluted EPS | $3.52 | $2.38 | 2011 was $2.69 excluding the Japan customs charge |
| Cash from operations | $311.0 million | $224.3 million | Increased with revenue and profitability |
| Cash and current investments | $333.4 million | $290.7 million | Cash and equivalents alone were $320.0 million at year-end |
| Working capital | $279.3 million | $288.9 million | Declined modestly |
| Debt | $194.0 million | $136.6 million | $39.0 million current; $155.0 million long-term |
Capital spending was $96.6 million. The company repurchased $201.5 million of shares and paid $48.4 million in dividends during 2012. The board approved a quarterly dividend increase to $0.30 per share for payment in March 2013.
In the fourth quarter, revenue was $588.3 million versus $495.3 million a year earlier; net income was $59.2 million versus $49.5 million, and diluted EPS was $0.97 versus $0.76.
Material changes and business trends
- Growth was broad-based, with especially strong Greater China revenue, up 67% to $570.7 million, and South Asia/Pacific revenue, up 40% to $330.3 million. Greater China represented 26% of annual revenue.
- Japan remained the largest single market at 23% of revenue. North Asia revenue rose 6%; Japan Actives declined 4% while Japan Sales Leaders increased 6%.
- Nu Skin product revenue rose to $1,178.4 million and Pharmanex revenue to $983.8 million. ageLOC skin-care products accounted for 23% of total revenue.
- Actives increased 11% to 946,000 and Sales Leaders rose 24% to 51,790. Subscription and loyalty programs represented 58% of non-limited-time-offer revenue.
- Limited-time offers of ageLOC products generated approximately $122 million in Greater China and $68 million in South Asia/Pacific during the second and third quarters. These event-driven sales can distort period comparisons; South Asia/Pacific revenue declined 3% in the fourth quarter year over year.
- Foreign-exchange movements reduced reported 2012 revenue by approximately 1% compared with 2011. Selling expenses rose to 44.7% of revenue from 43.1%, while general and administrative expenses fell to 23.3% from 25.0%.
Outlook, risks and unusual items
- Management expected 2013 gross margin of approximately 83.6% and an effective tax rate of approximately 35.2%–35.7%. It anticipated 2013 capital expenditures of approximately $150 million, including construction and expansion projects.
- The company planned a global limited-time offer for a new ageLOC weight-management system in the second half of 2013. Management cautioned that launch demand, supply availability, order-processing capacity, returns and inventory forecasts could affect results.
- Japan customs disputes remain significant. A $32.8 million assessment relating to earlier periods was expensed in 2011; the company appealed to Japan’s Supreme Court. A separate dispute involved approximately $46.7 million of assessments and disputed duties at year-end 2012. Related amounts paid or deposited were recorded as a long-term receivable; an adverse outcome could result in additional expense.
- The FDA had refused admission of shipments of Galvanic Spa facial units, which the company suspended importing. Nu Skin filed for clearance of an alternative unit in September 2012 and said the process could take nine months to a year or longer.
- Other material risks include evolving direct-selling and product regulations, particularly in China and Japan; distributor compliance and retention; reliance on key suppliers; currency exposure; and possible product-safety, product-claim and reputational issues. The company self-insures product-liability risk.
- A Utah lawsuit by two plaintiffs sought more than approximately $42 million in damages plus $200 million in punitive damages; the company said it would vigorously defend the claims. The filing states that litigation outcomes cannot be predicted.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2012. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether growth remains durable after the substantial contribution from limited-time product offers, particularly in Greater China and South Asia/Pacific.
- Developments and possible financial effects of both Japan customs disputes, including recoverability of the approximately $46.7 million receivable or deposit.
- Progress on FDA clearance for the alternative facial spa unit and the potential effect on U.S. product sales.
- China’s direct-selling licenses, regulatory requirements, operational expansion and planned store growth.
- Whether operating cash flow supports planned capital spending, debt obligations, share repurchases and the higher dividend.
- Currency impacts, inventory growth, and the company’s ability to maintain margins while sales commissions and launch-related costs rise.