Nu Skin Enterprises, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone Q4 report; it includes selected fourth-quarter operating data. Nu Skin develops and sells beauty and wellness products through direct selling in about 50 markets. Its Rhyz investment businesses contributed 7% of 2022 revenue.
Financial performance and liquidity
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $2.226 billion | $2.696 billion | Down 17% reported; down 12% at constant currency |
| Gross margin | 71.7% | 75.0% | Down 3.3 percentage points |
| Operating income | $110.8 million | $234.0 million | Down 53% |
| Net income | $104.8 million | $147.3 million | Down 29% |
| Diluted EPS | $2.07 | $2.86 | Down 28% |
| Cash from operations | $108.1 million | $141.6 million | Down $33.5 million |
- Operating margin was 5.0%, versus 8.7% in 2021. Cost of sales rose to 28.3% of revenue from 25.0%.
- Gross margin was pressured by promotions, geographic and product mix, and a $26.9 million incremental inventory write-off as the company aligned inventory with future sales plans.
- Cash and cash equivalents plus current investments totaled $278.5 million at year-end, down from $354.8 million. Working capital was $400.6 million, up from $343.3 million, partly reflecting debt reclassification following the 2022 refinancing.
- Year-end borrowings were $395.0 million under the term loan and $10.0 million under the revolver; balance-sheet debt, net of issuance costs, was approximately $402.5 million. The company reported compliance with its credit covenants. It had $200 million of interest-rate swaps; a one-percentage-point rate increase on unhedged variable debt was estimated to raise annual interest expense by about $2.0 million.
- Capital expenditures were $59.1 million. The company paid $77.0 million in dividends and repurchased $70.0 million of shares during 2022.
Changes versus the prior year
- Revenue fell across most regions. Mainland China declined 37% (35% constant currency), South Korea 24%, EMEA 28%, and Japan 16% reported. Southeast Asia/Pacific rose 2% reported and 7% constant currency; U.S. revenue increased 4%.
- At year-end, Customers declined 16% to 1.15 million, Paid Affiliates declined 13% to 236,956, and Sales Leaders declined 21% to 48,737. The company changed the Sales Leader definition during 2022; Mainland China’s year-end figure also reflects modified qualification requirements.
- Restructuring and impairment expense was $48.5 million, compared with $51.9 million in 2021. The 2022 global restructuring plan is expected to total $50–$55 million, including $40–$45 million of cash charges, and was expected to be substantially complete in the first half of 2023. The 2021 exit of Grow Tech generated additional 2022 cash costs.
- Other expense increased to $21.9 million from $1.5 million, including a $9.3 million unrealized investment loss, higher interest expense, and currency losses. The comparison also reflects a $18.1 million unrealized investment gain recorded in 2021.
- The income tax benefit was $15.8 million, versus $85.2 million of tax expense in 2021. The 2022 benefit chiefly reflected utilization of foreign tax credits and release of valuation allowances after a tax accounting method change; it materially supported earnings.
Outlook, commentary, and risks
- Management expected COVID-related constraints in Mainland China to continue through the first half of 2023 and said planned changes to the China compensation structure could further weigh on sales. The regulatory environment there was described as increasingly challenging.
- Management forecast a 2023 effective tax rate of approximately 18%–26% and capital expenditures of $75–$95 million. It expected 2023 term-loan principal payments of $15 million, quarterly dividends of approximately $19–$20 million, and lease payments of about $29.9 million. Management said cash, operating cash flow, and available credit were expected to fund needs.
- The company is investing in digital tools and social commerce, a transformation expected to require significant spending over several years. Sales of the ageLOC LumiSpa iO device were below expectations; the device generated approximately $42.1 million of 2022 revenue.
- Key risks include direct-selling and product-claims regulation, FTC scrutiny of earnings claims, China licensing and operating restrictions, sales-force contraction, social-media platform restrictions, foreign exchange, inflation, supply-chain and product-registration challenges, and cybersecurity and privacy risks. Currency movements reduced 2022 revenue by 5%.
- Manufacturing goodwill was not impaired, but its estimated fair value exceeded carrying value by only about 8% at the October 2022 test date; management identified it as at risk if revenue, margins, or discount-rate assumptions worsen.
- A long-running dispute with a former indoor-growing business claimant was settled in January 2023 for an amount described as immaterial; the claimant had sought damages exceeding $250 million. The filing also reports ongoing tax examinations and $23.1 million of unrecognized tax benefits at year-end.
- The auditor issued an unqualified opinion and concluded internal control over financial reporting was effective as of December 31, 2022.
Important facts for investors to verify
- Whether customer, affiliate, and Sales Leader trends stabilize, particularly in Mainland China and other declining markets; account for the revised China Sales Leader criteria.
- How much future gross margin and cash flow are affected by inventory reserves, promotions, freight, restructuring costs, and lower sales volumes.
- Whether the 2023 tax-rate outlook is sustainable after the one-time tax method change and foreign-tax-credit benefit; review tax exposures and the $23.1 million of unrecognized tax benefits.
- Debt repayment capacity, variable-rate exposure, covenant headroom, and the planned capital spending, dividends, and repurchases amid declining operating cash flow.
- Execution and returns from the digital transformation and connected-device launches, including the below-expectation LumiSpa iO results.
- The credit agreement disclosure gives differing maximum leverage-ratio figures in the supplied filing text (2.25:1 in MD&A and 2.75:1 in the credit-agreement note); verify the governing covenant and calculation.