Nu Skin Enterprises, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Nu Skin is a global direct-selling company selling personal-care and wellness products, with seven geographic segments plus Manufacturing and Grow Tech. Figures below are U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $703.3 | $589.9 | $1,833.7 | $1,837.1 |
| Gross margin | 73.9% | 76.2% | 74.7% | 76.0% |
| Operating income | $74.2 | $69.9 | $168.9 | $212.7 |
| Net income | $56.3 | $44.1 | $117.9 | $133.4 |
| Diluted EPS | $1.08 | $0.79 | $2.23 | $2.39 |
| Operating cash flow | Not provided separately | Not provided separately | $284.4 | $128.0 |
- Q3 revenue increased 19%; first-nine-month revenue was essentially flat year over year (down about 0.2% reported; up 2% at constant currency, a non-GAAP measure). Q3 net income rose about 28% and diluted EPS rose 37%; nine-month net income fell about 12% and diluted EPS fell 7%.
- Q3 gross margin declined 2.3 percentage points. Management cited higher freight costs, market and product mix, and increased Manufacturing contribution. Selling expenses were 39.9% of revenue in Q3 versus 39.3%; general and administrative expenses were $165.1 million versus $147.9 million.
- Cash and cash equivalents were $366.7 million at September 30; including current investments, cash and investments totaled $378.0 million. Working capital was $305.9 million, down from $383.4 million at year-end 2019. Nine-month operating cash flow benefited in part from cost-saving initiatives and higher commission accruals due to be paid in Q4.
- Debt included $345.0 million outstanding on the term loan before $2.3 million of debt issuance costs; $30.0 million was current. No revolving-credit borrowings were outstanding. The company reported compliance with its leverage and interest-coverage covenants. Four interest-rate swaps had a $200 million notional value.
- Nine-month capital expenditures were $48.8 million; management estimated full-year 2020 capital expenditures of $65–75 million. The quarterly dividend was $0.375 per share. The company repurchased 4.8 million shares for $127.4 million during the first nine months, with $342.8 million remaining under its authorization.
Material changes and segment trends
- Q3 growth was led by Americas/Pacific (+81% reported) and EMEA (+72%); Manufacturing revenue rose 34%. Mainland China revenue declined 3% in Q3 and 20% for the nine-month period. Nine-month revenue also declined in South Korea, Southeast Asia and Hong Kong/Taiwan.
- Sales Leaders increased 12% and Customers increased 28% year over year overall. Approximately 90% of Q3 sales were digital. Management attributed gains to digital tools, social selling, more online shopping and working from home, and product demand.
- Q3 included approximately $30 million of ageLOC Boost preview sales, making comparisons potentially sensitive to launch timing. Management planned to continue the product rollout across markets in Q4 2020 and Q1 2021. The reported results also reflected currency movements, including a negative effect in Americas/Pacific and a positive Q3 effect in EMEA.
- Despite higher Q3 revenue and income, nine-month operating income and earnings declined. Lower nine-month revenue in Mainland China and higher corporate and other expenses were among the factors; the nine-month effective tax rate fell to 28.5% from 33.8%, partly due to foreign tax credits and a Q3 uncertain-tax-position expiration.
Outlook, commentary and risks
- Management was optimistic about the remainder of 2020, citing continued investment in technology, Sales Leader development and product launches; the filing does not provide a specific revenue or earnings forecast. Nutricentials Bioadaptive Skin Care was planned for preview in Q4 2020 and broader availability in Q1 2021 in specified markets. ageLOC Boost launches were planned across markets during 2020–2021.
- COVID-19 continued to create uncertainty around in-person selling and events, supply chains, freight, travel and walk-in locations. Management said future effects could affect estimates including goodwill and long-lived-asset impairment, taxes and inventory recoverability. Fast growth in Americas/Pacific and EMEA strained resources and required additional air freight.
- Other risks include foreign-exchange volatility; international regulation, tax and currency-repatriation limits; U.S.–China tensions; cybersecurity and privacy exposure; and potential direct-selling product or earnings claims by distributors. A significant downturn could also pressure liquidity and debt-covenant compliance.
- A consultant’s lawsuit alleges a 50% ownership and profit interest in the indoor-growing business and seeks damages exceeding $250 million. Nu Skin disputes the claims and says it intends to defend itself. Management stated that the ultimate liability from claims and contingencies generally was not likely to materially affect consolidated results, but the specific lawsuit remains a matter to monitor.
- The company reported effective disclosure controls as of September 30, 2020 and no material change in internal control over financial reporting during the quarter. A revised deferred compensation plan effective January 1, 2021 provides for a company match of up to 5% of salary; management anticipated reducing discretionary contributions from 10% to 5%.
Key facts for investors to verify
- Whether digital-led growth and elevated customer and Sales Leader counts persist after COVID-related conditions and ageLOC Boost preview sales normalize.
- Whether gross margins recover as freight costs, product mix and regional growth trends change.
- Cash-flow durability, including the timing of accrued commissions, planned capital expenditures, dividends, share repurchases and debt amortization.
- Developments in Mainland China, international regulatory and currency risks, and the consultant’s litigation and claimed damages.
- Any updated management outlook or material changes to COVID-19 impacts, supply constraints, tax estimates or covenant headroom.