Nu Skin Enterprises, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Nu Skin is a global direct-selling company offering personal care products and nutritional supplements through seven geographic segments and approximately 50 markets.
Financial performance and liquidity
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $550.1 million, down 8% reported and 7% at constant currency | $1,049.2 million, down 2% reported and 1% at constant currency |
| Gross margin | 77.9%, versus 78.7% | 77.8%, versus 75.2% reported; prior-year margin was 78.1% excluding the Japan customs charge |
| Operating income | $64.7 million, versus $79.8 million | $111.0 million, versus $87.9 million |
| Net income | $42.0 million, versus $44.7 million | $69.5 million, versus $48.0 million; prior-year net income was $68.1 million excluding the Japan customs charge |
| Diluted EPS | $0.77, versus $0.79 | $1.28, versus $0.85; prior-year EPS was $1.21 excluding the customs charge |
| Operating cash flow | Not separately presented | $84.0 million, versus $135.8 million |
Q2 profit was pressured by lower revenue: selling and administrative expenses declined in dollars but were broadly stable or higher as a percentage of sales. The lower effective tax rate, partly reflecting the new stock-compensation accounting standard, helped offset the revenue decline. Other expense fell to $2.7 million in Q2 from $11.1 million, largely because of prior-year foreign-currency losses.
At June 30, cash and cash equivalents were $345.1 million, with current investments of $8.0 million; combined, $353.1 million, down from $368.1 million at year-end. Working capital was $319.8 million. Debt totaled approximately $424.6 million on the balance sheet: $100.5 million current and $324.1 million long-term. The company reported compliance with its credit covenants. First-half capital expenditures were $27.8 million; management anticipated approximately $30 million more during the remainder of 2017.
Changes versus the prior comparable period
- Prior-year Q2 and first-half revenue included approximately $106 million from ageLOC Me and ageLOC Youth limited-time offers; no comparable offers occurred in the first half of 2017. Foreign exchange reduced reported revenue by 2% in Q2 and 1% for the first half.
- Q2 Sales Leaders decreased 11% year over year, while Customers increased 5%. At June 30, there were 58,900 Sales Leaders and 1.06 million Customers.
- Americas revenue increased 14% in Q2, supported by social-media selling initiatives. Mainland China Q2 revenue declined 7%, though Customers grew 16%; South Asia/Pacific fell 26%, Japan 11%, Hong Kong/Taiwan 18%, and South Korea 7%. EMEA increased 1%.
- Nu Skin product-line revenue was $345.3 million in Q2, down from $365.3 million; Pharmanex revenue was $202.9 million, down from $234.0 million.
- First-half operating cash flow fell by $51.8 million. Management attributed the decline principally to lower sales and higher accrued expenses in Mainland China in the prior-year period.
Outlook, management commentary, and risks
- Management expected a difficult Q3 comparison because a South Korea ageLOC Youth limited-time offer generated approximately $49 million in Q3 2016 revenue. The company planned a limited ageLOC LumiSpa offering at its Q4 global event, followed by broader launches in Q4 2017 and Q1 2018; it anticipated approximately $100 million of Q4 LumiSpa revenue, with limited inventory constraining the launch.
- Management believed available cash, operating cash flow, and credit facilities would be adequate for short- and long-term needs. It anticipated continuing quarterly dividends, subject to board discretion. A Q3 dividend of $0.36 per share was declared; $177.6 million remained available under the share-repurchase authorization at June 30.
- Cash held outside the U.S. was $320.3 million, including $137.1 million denominated in Chinese RMB. Chinese government limits on intercompany lending had slowed access to some cash in Mainland China; certain markets also impose requirements on dividend repatriation.
- The Japan High Court upheld customs assessments relating to 2010 imports; the company appealed to the Japan Supreme Court. The previously recorded $31.4 million charge was recognized in Q1 2016, and the dispute over other periods remained pending. Management stated that litigation and investigations were not expected to have a material consolidated effect, but outcomes were uncertain.
- The company cited regulatory exposure involving product claims, labeling, direct selling, and foreign tax and customs authorities; foreign-exchange movements; and market-specific weakness, including online competition and political and economic pressures in South Korea. It ceased Turkish operations in June; Turkey represented less than 1% of 2016 consolidated revenue.
- Management identified a loyalty-points accounting change under the revenue-recognition standard, planned for adoption in Q1 2018 using a cumulative adjustment to retained earnings. The impact was still being evaluated. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether customer growth, Sales Leader trends, and social-media initiatives can sustain Americas growth and improve performance in South Korea, Japan, and Hong Kong/Taiwan.
- Whether the planned LumiSpa launch achieves the approximately $100 million Q4 revenue expectation, given inventory limits, and how the Q3 South Korea comparison affects results.
- The outcome and potential financial exposure of the Japan customs appeal and other tax or regulatory reviews.
- Cash accessibility in Mainland China, foreign-exchange effects, and the company’s capacity to fund dividends, repurchases, capital expenditures, and debt obligations.
- The eventual financial impact of the loyalty-points revenue-recognition change and the conversion or repayment terms of the $210 million 4.75% convertible notes due in 2020.