Nu Skin Enterprises, Inc. — FY2014 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Nu Skin is a direct-selling marketer of personal-care and nutritional products in 53 markets; approximately 91% of annual revenue was generated outside the United States.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $2.569 billion | $3.177 billion |
| Gross profit / margin | $2.091 billion / 81.4% | $2.671 billion / 84.1% |
| Operating income / margin | $352.2 million / 13.7% | $554.1 million / 17.4% |
| Net income / margin | $189.2 million / 7.4% | $364.9 million / 11.5% |
| Diluted EPS | $3.11 | $5.94 |
| Cash from operations | $(56.5) million | $530.2 million |
| Capital expenditures | $101.5 million | $185.1 million |
Revenue fell 19% year over year; foreign exchange reduced reported revenue by approximately 3%. Greater China revenue declined 30% to $948.5 million, North Asia 10% to $783.0 million, the Americas 11% to $329.0 million, South Asia/Pacific 13% to $328.4 million, and EMEA 7% to $180.6 million. Mainland China revenue was $675.1 million, down 33%.
Fourth quarter: Revenue was $609.6 million versus $1.056 billion a year earlier (down about 42%); operating income was $91.3 million versus $188.6 million; net income was $46.5 million versus $125.3 million; diluted EPS was $0.77 versus $2.02.
Liquidity and debt: Year-end cash and current investments totaled $300.2 million, down from $547.1 million; working capital was $416.3 million. Balance-sheet debt was approximately $247.3 million, comprising $82.8 million current and $164.6 million long-term; the stated facility balance was $252.8 million before a $5.5 million debt discount. The company reported compliance with its credit covenants. Cash from operations was negative for the year, but positive $128.4 million in the second half.
Material changes and unusual items
- Actives fell 10% to 1.208 million and Sales Leaders fell 39% to 62,009. Greater China’s Sales Leaders decreased 60% from 2013, reflecting the Mainland China disruption.
- 2013 results included approximately $550 million of global ageLOC TR90 limited-time-offer sales. Smaller 2014 offers generated $194 million, making comparisons unusually difficult.
- Gross margin was pressured by a $50 million inventory write-down, mainly in Mainland China, lower utilization of China manufacturing, currency effects, a reduced China revenue mix and promotions.
- Other expense was $53.7 million, including a $46.3 million non-cash Venezuela currency charge and a $7.4 million debt-prepayment charge. The 2014 effective tax rate was 36.6%, partly affected by the Venezuela charge.
- Operating cash flow declined sharply as the company paid sales incentives accrued after 2013 record sales, paid amounts owed for inventory built for planned launches, and absorbed lower earnings.
Outlook, risks and contingencies
- Management expected the strengthening U.S. dollar to continue weighing on 2015 results. Planned 2015 capital expenditures were approximately $75 million; the company said existing cash, operating cash flows and credit lines should meet cash needs.
- Planned launches for 2015–2016 included ageLOC Youth, ageLOC Me and essential oils. Management cautioned that product launches and limited-time offers can create volatile comparisons, supply-chain pressure and inventory risk.
- In Mainland China, the company voluntarily suspended business meetings and new sales-representative applications in early 2014 amid adverse media coverage and a government review; these activities resumed in May. Regulators imposed fines totaling approximately $781,000 for product-channel registration, unsupported claims and unauthorized promotions. Management described the recovery outlook as uncertain.
- A securities class action and shareholder derivative action allege misleading disclosures related to China operations. The court denied the company’s motion to dismiss the class action in February 2015; the company said it would defend the claims.
- A Japan customs dispute covers approximately ¥4.5 billion ($37.6 million) of disputed assessments and duties. The matter was pending in Tokyo District Court; an adverse result could require a non-cash expense. The company also faced substantial product, direct-selling, advertising, tax, currency-control and product-liability risks across markets.
- The company reported that a material weakness in controls for Venezuela hyperinflationary accounting, identified during 2014, was remediated by year-end; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2014.
- The board approved a quarterly dividend of $0.35 per share for payment in March 2015. Future dividends remain subject to board discretion. Management estimated that adopting Venezuela’s new SIMADI exchange rate could cause an approximately $10 million first-quarter 2015 expense, assuming an initial rate of 170 bolivars per U.S. dollar.
Investor verification priorities
- Whether China sales-force and revenue trends stabilized and recovered after the 2014 suspension and regulatory review.
- How recurring revenue and margins perform without the exceptional 2013 TR90 launch, and whether inventory levels or further write-downs remain a concern.
- The durability of operating cash flow, including the effects of incentive payments, working capital, capital spending, dividends and repurchases.
- Developments in the Japan customs case and China-related litigation, including potential financial exposure and effects on operations.
- Venezuela’s exchange-rate treatment, potential further currency losses, and the ability to access or repatriate cash held in China and Venezuela.