Nu Skin Enterprises, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company sells personal care and wellness products through a global direct-selling business, alongside manufacturing and Grow Tech segments. Unless stated otherwise, financial figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $612.4 million | $623.5 million | $1,130.4 million | $1,247.1 million |
| Gross profit | $458.3 million | $469.5 million | $850.5 million | $946.4 million |
| Operating income | $58.1 million | $74.2 million | $94.6 million | $142.9 million |
| Net income | $41.9 million | $46.3 million | $61.6 million | $89.4 million |
| Diluted EPS | $0.81 | $0.83 | $1.15 | $1.59 |
- Revenue decreased 2% in Q2 and 9% in the first half year over year; on a constant-currency basis, it increased 1% in Q2 and declined 7% in the first half.
- Gross margin was 74.8% in Q2 versus 75.3%; first-half gross margin was 75.2% versus 75.9%. Higher freight costs weighed on margins.
- Operating margin was approximately 9.5% in Q2 versus 11.9%; first-half operating margin was approximately 8.4% versus 11.5%. Selling and G&A expenses consumed a higher share of revenue.
- First-half operating cash flow was $166.1 million, up from $74.5 million. Capital expenditures were $28.7 million, implying approximate operating-cash-flow less capex of $137.4 million; this is a simple derived measure, not a company-reported non-GAAP metric.
- At June 30, cash and cash equivalents were $375.5 million and current investments were $10.8 million. Working capital was $301.2 million, down from $383.4 million at year-end; current assets were $785.8 million and current liabilities $484.6 million.
- Debt balances were $352.5 million on the term loan and $65.0 million on the revolver. Contractual principal totaled $417.5 million; the balance sheet reported current debt of $95.0 million and long-term debt of $319.9 million, net of debt issuance costs. The company was compliant with its debt covenants.
Changes and operating drivers
- Sales Leaders declined 9% year over year while Customers increased 29%. Management attributed the leader decline primarily to Greater China weakness beginning in 2019, compounded by COVID-19 restrictions and reduced in-person activity.
- Mainland China revenue fell 21% in Q2 and 28% in the first half. Americas/Pacific grew 38% in Q2 and 13% in the first half; EMEA grew 17% in Q2. South Korea, Southeast Asia and Hong Kong/Taiwan reported Q2 declines.
- Digital tools and social selling helped Americas/Pacific and EMEA adapt to restrictions. The company cautioned that customer-count growth may partly reflect a shift from sales-force resale to customers purchasing directly from the company.
- First-half cash flow improved in part due to inventory management and cost initiatives, and because 2019 included higher payouts of accrued costs. The 2020 cash flow also benefited from commissions accrued late in the quarter and payable in Q3.
- Cash uses included $107.4 million of first-half share repurchases and $40.0 million of dividends. The company repurchased 4.4 million shares in the first half; $362.8 million remained available under its repurchase authorization.
Outlook, risks and contingencies
- Management said the duration and severity of COVID-19 effects remain uncertain. Restrictions on gatherings, travel and walk-in locations, supply interruptions, and consumer hesitancy may continue to affect sales and operations, particularly in South Korea and Southeast Asia.
- Management expressed optimism about the second half, citing customer initiatives, technology enhancements and plans to introduce the ageLOC Boost, primarily in Q4 2020, with rollout across most segments continuing in the first half of 2021. The U.S. and EMEA Nutricentials Bioadaptive Skin Care line was planned for preview in Q4 2020 and general availability in Q1 2021. These are plans, not guaranteed results.
- Estimated 2020 capital expenditures were $65–70 million. A new Mainland China manufacturing plant was expected to cost about $55 million over two to three years, including $15–18 million in 2020; approximately $13.3 million had been spent to date.
- The company believed cash, operating cash flow and existing credit lines would meet short- and long-term needs. However, weaker results could affect covenant compliance and debt service. Foreign cash repatriation restrictions and currency movements are additional liquidity and earnings risks.
- Other risks include direct-selling regulation and product or earnings claims, U.S.–China tensions, cybersecurity and data privacy, and the possibility of further supply-chain disruption. Management said pending litigation and other contingencies were not expected to materially affect consolidated results, but outcomes of certain foreign tax examinations remained undetermined.
- The board declared a $0.375-per-share dividend in July, payable September 9, 2020, subject to the stated record date and board discretion. The company gave no specific full-year revenue or earnings guidance in the provided filing text.
Key facts for investors to verify
- Whether customer growth converts into sustained sales leadership and revenue, especially in Greater China and COVID-affected Asian markets.
- Whether Americas/Pacific and EMEA growth persists and how much reflects underlying demand versus channel shifts or product launches.
- Whether freight, commissions and other selling costs continue to pressure gross and operating margins.
- Cash-flow sustainability after considering accrued commissions, dividends, repurchases and planned capital spending; and the company’s ability to manage debt and meet covenants if conditions worsen.
- Actual timing and performance of ageLOC Boost and Nutricentials launches, as well as progress and spending on the Mainland China manufacturing plant.
- Potential effects of COVID-19, currency changes, repatriation limits, regulatory scrutiny, tax examinations and cybersecurity incidents.