Nu Skin Enterprises, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The annual report also presents unaudited fourth-quarter results. Nu Skin develops and sells beauty and nutrition products through direct selling in approximately 50 markets; about 91% of FY 2016 revenue was generated outside the United States. Mainland China represented about 28% of revenue.
Key financial results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $2,207.8 million | $2,247.0 million |
| Gross profit / gross margin | $1,707.3 million / 77.3% | $1,757.5 million / 78.2% |
| Operating income / operating margin | $231.1 million / 10.5% | $244.7 million / 10.9% |
| Net income / net margin | $143.1 million / 6.5% | $133.0 million / 5.9% |
| Diluted EPS | $2.55 | $2.25 |
| Cash from operating activities | $275.3 million | $322.1 million |
Q4 2016: Revenue was $531.3 million versus $572.2 million in Q4 2015; gross profit was $422.8 million versus $450.8 million; operating income was $60.8 million versus $61.7 million; and net income was $38.2 million versus $35.8 million. Diluted EPS was $0.69 versus $0.62. The filing does not provide quarterly cash-flow figures in the supplied text.
Liquidity and debt: Cash and current investments totaled $368.1 million at year-end, up from $303.7 million; working capital was $315.3 million. Balance-sheet debt was approximately $416.9 million, comprising $82.7 million current and $334.2 million long-term. The company generated $275.3 million of operating cash flow, spent $50.2 million on capital expenditures, paid $78.4 million in dividends, and repurchased $247.2 million of shares. FY 2017 capital expenditures were expected to be approximately $60 million.
Changes and operating drivers
- FY revenue declined 2% year over year; foreign exchange reduced reported revenue by approximately 2%. Net income increased 8% and diluted EPS increased from $2.25 to $2.55, helped by lower selling expenses as a share of revenue, reduced foreign-currency charges, and fewer weighted-average shares following repurchases.
- Regional performance was mixed: Greater China revenue increased 3% to $794.4 million, including 8% growth in Mainland China; North Asia increased 1%; EMEA increased 7%; South Asia/Pacific declined 8%; and the Americas declined 16%.
- Customers fell 1% to 988,000 and Sales Leaders fell 9% to 61,627. The Americas and South Asia/Pacific declines and weaker activity in several mature markets offset growth in Mainland China and EMEA.
- Nu Skin products generated $1,308.1 million, down from $1,363.5 million; Pharmanex generated $892.7 million, up from $877.9 million. ageLOC Youth and ageLOC Me produced more than $400 million of combined revenue during 2016, according to management.
Outlook, risks and unusual items
- No quantified revenue, earnings, or margin guidance is provided. Management expected new product launches to support revenue and planned to launch the ageLOC LumiSpa device from the second half of 2017 into 2018. The company expected existing cash, operating cash flows, and credit lines to meet short- and long-term cash needs, while noting that repurchases and dividends could be reduced if needed.
- Gross margin was pressured by a $31.4 million non-cash Japan customs charge recorded in Q1 2016. The company appealed the ruling to the Tokyo High Court. The charge represents disputed assessments previously paid.
- Foreign-exchange exposure remains significant: 91% of sales were transacted in foreign currencies, while much inventory is purchased in U.S. dollars. The company ceased Venezuela operations in Q3 2016 after currency restrictions and operating challenges.
- Key risks include direct-selling and anti-pyramid regulation, distributor claims and conduct, ongoing scrutiny in Mainland China, product-claim and product-safety regulation, supplier and launch execution risks, and customer and Sales Leader retention. The 2014 China scrutiny materially affected regional revenue and the sales network; management said the business had not fully recovered from those events.
- The $210 million 4.75% convertible notes mature in 2020 and are convertible at a stated initial conversion price of $46.50 per share. Principal is payable in cash upon conversion or maturity, creating a future liquidity requirement. Credit facilities also require compliance with leverage and interest-coverage covenants; the company reported covenant compliance at year-end.
- The company disclosed a 2016 SEC resolution concerning a 2013 China charitable contribution: it paid $765,688 without admitting or denying the SEC findings. A Taiwan proceeding alleged improper sales of ageLOC Spa devices in 2011–2012; the company contested the allegations. Management stated other pending legal matters were not expected to have a material adverse effect, but outcomes remain uncertain.
- Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2016. A CEO transition was planned: CFO Ritch Wood was to become CEO after a new CFO was appointed, Ryan Napierski was to become president, and Truman Hunt was to become vice chairman.
Investor verification priorities
- Confirm whether Mainland China growth and the ageLOC Me launch can continue without relying on temporary promotional surges; monitor regional Customers and Sales Leaders.
- Review the outcome and potential financial implications of the Japan customs appeal and the Taiwan device-related proceeding.
- Assess debt repayment and conversion capacity, covenant headroom, and the funding of dividends and repurchases alongside planned capital spending.
- Track foreign-exchange effects, especially the U.S. dollar exposure and restrictions on accessing or repatriating overseas cash.
- Evaluate whether product launches, regulatory compliance, and sales-force oversight can sustain demand without inventory write-downs or material claims-related costs.