Nu Skin Enterprises, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Nu Skin develops and sells beauty and wellness products through direct selling in about 50 markets; approximately 88% of FY 2018 revenue came from outside the United States. Mainland China was its largest market.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $2.679 billion | $2.279 billion |
| Gross profit / margin | $2.045 billion / 76.3% | $1.777 billion / 78.0% |
| Operating income / margin | $240.9 million / 9.0% | $274.5 million / 12.1% |
| Net income | $121.9 million | $129.4 million |
| Diluted EPS | $2.16 | $2.36 |
| Cash from operations | $202.7 million | $302.6 million |
| Cash, cash equivalents and current investments, year-end | $398.3 million | $438.2 million |
| Working capital, year-end | $359.6 million | $330.4 million |
| Long-term debt, including current portion, year-end | $430.5 million carrying value | $388.6 million |
FY 2018 cash capital expenditures were $70.4 million. The company paid $80.6 million in dividends and repurchased $69.6 million of stock during the year. Fourth-quarter revenue was $683.3 million versus $666.2 million a year earlier; fourth-quarter net loss was $17.8 million, or diluted loss per share of $0.32, compared with net income of $18.2 million, or $0.33 diluted EPS, in Q4 2017.
Material changes versus the prior period
- Annual revenue increased 17.5%; management attributed growth to LumiSpa, regional sales activity and the newly acquired manufacturing and packaging businesses. LumiSpa generated approximately $278 million of FY 2018 revenue versus $130 million in 2017.
- Customers rose 16% to 1.244 million at year-end, while Sales Leaders fell 10% to 73,400. The company cautions that changes to its Velocity compensation program affected Sales Leader qualification counts.
- Gross margin declined 1.7 percentage points, mainly because acquired manufacturing businesses operate at lower margins; LumiSpa also carries a somewhat lower margin. Operating income and diluted EPS fell despite higher revenue.
- Operating cash flow decreased by about $100 million, reflecting payment of prior-year accruals, inventory investment and increased compensation payments.
- FY 2018 results included $70.7 million of restructuring and impairment charges, including a non-cash $48.6 million impairment of technology assets and $22.1 million of cash severance and related charges. A separate $7.2 million inventory write-off was recorded in cost of sales.
Outlook, commentary and risks
- Management estimated a 33%–36% effective tax rate for 2019. It forecast capital expenditures of $65–$75 million, plus approximately $20–$30 million in 2019 for a planned Mainland China manufacturing plant expected to cost about $55 million over two to three years. No full-year revenue or EPS guidance is provided in the filing.
- In early 2019, Chinese authorities advised the company to temporarily limit certain business meetings in most provinces amid heightened scrutiny of the healthcare and direct-selling industries; management said this could weigh on first-quarter and later results.
- China contributed 33% of FY 2018 revenue. Regulatory interpretation, licensing, product registration and potential business interruptions there are significant risks. The company held $122.9 million in Chinese RMB at year-end and noted restrictions and procedural requirements on cash repatriation.
- Other material risks include foreign-currency exposure (2018 revenue benefited about 1% from currency movements, while currency-related expense was $16.4 million), trade tensions and tariffs, direct-selling and product-claim regulation, sales-force retention, product supply and quality, and data security. Argentina was treated as a highly inflationary economy beginning in Q3 2018.
- The company had a $400 million term loan and a $350 million revolving facility under its 2018 credit agreement, with $49.5 million drawn on the revolver at year-end. It reported compliance with leverage and interest-coverage covenants. Management believed cash, operating cash flow and available credit would meet expected needs.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end. Management said pending legal matters were not expected to have a material effect, while noting outcomes cannot be assured.
Important facts for investors to verify
- Whether China’s temporary restrictions on meetings, licensing and regulatory scrutiny affect sales, customer activity or the company’s operating model.
- How much revenue growth is attributable to recurring core demand versus LumiSpa launch activity and acquired businesses, and whether Customers translate into sustained purchases.
- Whether margins and cash generation recover after the 2018 decline, including the effects of acquired businesses, inventory investment and the technology transition.
- Debt repayment, interest costs, covenant headroom and the cash available for dividends, repurchases and planned capital spending.
- Whether the 2019 tax-rate estimate and capital-spending plans remain achievable, and whether foreign-exchange or trade developments materially change reported results.