Nu Skin Enterprises, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Nu Skin is a global direct-selling company of personal-care products and nutritional supplements, reporting revenue across five geographic regions. Figures below are in U.S. dollars; financial statement amounts are converted to millions unless otherwise noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $600.5m | $560.2m | $1,072.3m | $1,103.5m |
| Gross margin | 78.7% | 80.3% | 75.2% | 80.5% |
| Operating income | $79.8m | $71.8m | $87.9m | $140.4m |
| Net income | $44.7m | $44.7m | $48.0m | $80.9m |
| Diluted EPS | $0.79 | $0.75 | $0.85 | $1.35 |
- Revenue and regions: Q2 revenue rose 7% year over year, while first-half revenue fell 3%. Q2 growth included approximately $106m from limited-time offers in Greater China and South Asia/Pacific. Q2 Greater China revenue increased 18%, South Asia/Pacific 36%, while North Asia declined 4% and the Americas declined 19%.
- Profitability: Q2 operating income increased, but net income was essentially unchanged, reflecting $11.1m of foreign-currency translation expense in other expense. First-half operating income and net income declined. Excluding a $31.4m Japan customs charge, first-half diluted EPS was $1.21 and net income was $68.1m; these are company-presented non-GAAP measures.
- Margins and expenses: Q2 gross margin fell to 78.7%, primarily due to ageLOC Me promotions and U.S. dollar strength. First-half reported gross margin was 75.2%; excluding the customs charge it was 78.1%. Selling expenses were 41.4% of revenue in both Q2 and the first half. First-half G&A was $274.4m, approximately flat year over year.
- Cash flow: First-half operating cash flow was $135.8m versus $159.6m a year earlier. Investing activities used $28.1m, including $24.7m of capital expenditures; financing activities provided $150.5m, substantially reflecting new borrowing. Cash and cash equivalents were $544.8m at June 30, versus $289.4m at year-end.
- Liquidity and debt: Cash plus current investments totaled $556.4m; working capital was $519.6m. Balance-sheet current and long-term debt totaled approximately $458.9m. The company issued $210m of 4.75% convertible senior notes due 2020; effective interest expense is approximately 7.1%. The notes are convertible beginning December 2016 at an initial $46.50 conversion price. The company reported compliance with its credit-agreement covenants.
- Capital returns: First-half dividends paid totaled $39.7m, at $0.355 per share per quarter. The company repurchased $24.3m of shares in the first half, with $422.7m remaining under its $500m authorization, and said it planned to use convertible-note proceeds primarily for further repurchases.
Changes, outlook, and material matters
- Q2 revenue growth contrasts with the first-half decline and was materially supported by limited-time product offers. Management cautioned that these offers can distort period comparisons; South Asia/Pacific faced a difficult Q3 comparison against a prior-year offer that generated about $47m.
- Management expected the stronger U.S. dollar to continue weighing on 2016 results. It anticipated revenue support from the continued rollout of ageLOC Me and ageLOC Youth, but gave no numerical revenue or earnings guidance in the provided filing text.
- In February 2016, a Japanese court upheld customs assessments. The company recorded a $31.4m non-cash first-quarter cost-of-sales charge for assessments previously paid and appealed the decision to the Tokyo High Court.
- A $47m securities-class-action settlement was funded by insurers into escrow; final court approval was still pending, with a hearing scheduled for October 2016. A derivative-action settlement, including governance measures and $1.3m in attorneys’ fees and expenses, also awaited final approval; the company expected insurers to cover approximately $1.0m.
- Key risks include currency fluctuations, regulatory challenges to direct selling and product claims, market softness, and tax/customs examinations. Management cited softness in Taiwan and Hong Kong, South Korea, the U.S., and Latin America, particularly Venezuela. The filing also notes foreign-cash repatriation constraints, including in Mainland China.
- Management said existing cash, operating cash flows, and credit lines should fund short- and long-term needs; it noted it could reduce capital spending, buybacks, or dividends if funding proved insufficient. Planned remaining-2016 capital expenditures were approximately $30m.
Important facts for investors to verify
- Whether limited-time offers translate into sustained demand, particularly in Greater China and South Asia/Pacific, and how Q3 comparisons affect reported growth.
- Progress and financial impact of the Japan customs appeal, and whether further costs or recoveries arise.
- Final court approval and completion of both settlements, including confirmation of insurer funding and any company cash exposure.
- Convertible-note terms, dilution or cash-settlement effects upon conversion, and the impact of planned share repurchases on leverage and per-share results.
- Regional sales-force trends, foreign-exchange effects, and any material regulatory, tax, or cash-repatriation developments.