Nu Skin Enterprises, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Nu Skin is a global direct-selling company selling personal-care products and nutritional supplements. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods. Unless stated otherwise, amounts below are U.S. dollars.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $571.3m | $638.8m | $1,674.8m | $1,959.9m |
| Gross profit margin | 73.3% | 82.9% | 78.0% | 81.0% |
| Operating income | $42.5m | $105.0m | $183.0m | $260.9m |
| Net income | $16.3m | $68.3m | $97.2m | $142.7m |
| Diluted earnings per share | $0.28 | $1.12 | $1.63 | $2.34 |
| Operating cash flow | — | $242.0m | $(151.3)m |
- Revenue fell 11% in Q3 and 15% for the nine-month period. Reported revenue was reduced by currency movements by 10% and 8%, respectively, and by comparisons with substantial prior-year limited-time-offer sales.
- Q3 operating margin was approximately 7.4%, versus 16.4% a year earlier; nine-month operating margin was approximately 10.9%, versus 13.3%. The filing reports gross margin of 73.3% and 78.0% for those 2015 periods.
- At September 30, cash and cash equivalents were $305.8m, current investments $10.9m, and working capital $365.8m. Cash plus current investments totaled $316.7m, compared with $300.2m at year-end 2014.
- Balance-sheet debt was approximately $253.0m, comprising $66.7m current and $186.2m long-term debt, compared with approximately $247.3m at December 31, 2014. The company reported $47.5m drawn on its revolving facility and said it complied with its leverage and interest-coverage covenants.
Material changes and drivers
- Q3 revenue decreased across Greater China, North Asia, the Americas and EMEA; South Asia/Pacific grew 22% in reported dollars, largely on $47.3m of ageLOC Youth limited-time-offer sales. Greater China revenue fell 17%, and North Asia fell 18%.
- Q3 included a $37.9m inventory write-down in Greater China, following weaker sequential revenue and the decision to discontinue discounted promotions while preparing for ageLOC Me. The charge contributed to lower gross margin and earnings.
- Other income/expense was a $14.4m expense in Q3, including $11.1m of foreign-currency translation expense. The first nine months included a $10.2m Venezuela currency loss in Q1. Foreign-exchange effects and currency translation remain important sources of volatility.
- For the nine months, operating cash flow improved by $393.2m versus 2014. Management attributed the prior-year cash outflow largely to payment of previously accrued expenses and inventory purchases for anticipated 2014 sales. Inventory fell to $260.5m from $338.5m at year-end.
- Operating expenses declined in dollars, but lower revenue and the inventory charge weighed on profitability. The company also reclassified warehousing and shipping overhead from general and administrative expense to cost of sales: $7.6m in Q3 and $23.5m for the nine months; prior periods were not recast.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management expected the stronger U.S. dollar to continue affecting results through 2015 and early 2016, and anticipated that new product introductions would support revenue. Planned launches included ageLOC Youth and ageLOC Me in selected markets, and Epoch essential oils in EMEA.
- Management said existing cash, operating cash flow and credit lines should fund short- and long-term needs. It anticipated about $15m of additional 2015 capital expenditures. The board declared a further $0.35-per-share dividend for December 2015; future dividends remain at the board’s discretion.
- In October 2015, the board terminated the existing repurchase program and approved a new plan with an initial $500m authorization. The company had repurchased $104.1m of shares in the first nine months of 2015.
- A Japan customs dispute involved approximately 4.4bn yen ($37.0m) of assessments and disputed duties. The company believes the assessments are improper and records the disputed amount as a receivable; an adverse outcome could result in a non-cash expense. A court decision was anticipated during 2015.
- The company faces a securities class action concerning statements about Mainland China operations and a related derivative action; it cannot estimate potential loss. A separate Utah lawsuit and counterclaims seek substantial compensatory and punitive damages; trial was scheduled for Q2 2016. The company disputes the claims.
- Venezuela’s currency controls restrict access to foreign currency and repatriation. Management reported $8.2m of Venezuelan assets, including $3.2m of monetary assets, at September 30, 2015, and described operations there as a small share of overall business.
- Other risks include regulatory and direct-selling compliance, foreign exchange, tax examinations and inventory valuation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales, active distributors and Sales Leaders stabilize, particularly in Greater China, and whether planned product launches generate durable demand beyond limited-time offers.
- Whether further inventory adjustments are needed and how the $37.9m write-down affects future gross margins and product-promotion strategy.
- The effect of foreign exchange, including currency translation and Venezuela’s restrictions, on reported revenue, earnings and cash availability.
- Developments and potential financial exposure in the Japan customs dispute and pending litigation; the filing does not provide a clear estimate of possible losses.
- Debt, covenant headroom and cash deployment, including the new $500m repurchase authorization, dividends and planned capital expenditures.