Nu Skin Enterprises, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Nu Skin is a global direct-selling company of personal care products and nutritional supplements, operating across seven geographic segments. Amounts below are U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $563.7m | $604.2m | $1,612.9m | $1,676.5m |
| Gross profit | $442.9m | $478.3m | $1,259.3m | $1,284.5m |
| Operating income | $64.4m | $82.4m | $175.4m | $170.3m |
| Net income | $41.7m | $56.9m | $111.2m | $104.9m |
| Diluted EPS | $0.76 | $0.98 | $2.04 | $1.85 |
| Operating cash flow | Not separately presented | Not separately presented | $155.8m | $185.4m |
Margins and expenses: Gross margin was 78.6% in Q3 versus 79.2%; nine-month margin was 78.1% versus 76.6%. Excluding a $31.4m Japan customs charge booked in Q1 2016, prior-year nine-month gross margin was 78.5%. Q3 selling expenses were 41.7% of revenue versus 42.3%; G&A was 25.4% versus 23.3%. Nine-month G&A was $411.3m versus $415.0m.
Balance sheet and liquidity at September 30: Cash and cash equivalents were $363.8m, with current investments of $8.0m; cash plus current investments totaled $371.8m. Working capital was $329.4m. Total debt carrying value was $418.2m, including $101.7m current and $316.5m long-term. The company reported compliance with its credit agreement covenants. Nine-month capital expenditures were $39.0m.
Changes versus comparable periods
- Revenue decreased 7% in Q3 and 4% for the first nine months. Management attributed much of the comparison to prior-year limited-time ageLOC Me and ageLOC Youth offers, which generated about $56m in Q3 2016 and $163m in the first nine months of 2016. Foreign exchange reduced reported revenue by about 1% in both 2017 comparison periods.
- Q3 net income fell to $41.7m from $56.9m, and diluted EPS declined to $0.76 from $0.98. Nine-month net income and EPS were above reported 2016 results, but below 2016 results excluding the Japan customs charge: adjusted prior-year net income was $125.0m and diluted EPS was $2.21. These adjusted figures are non-GAAP.
- Nine-month operating cash flow declined $29.6m year over year. Management cited lower sales, partly offset by prior-year cash payments for liabilities accrued at the end of 2015.
- By segment, Q3 revenue grew in Mainland China, the Americas, South Asia/Pacific and EMEA, but fell sharply in South Korea and declined in Japan and Hong Kong/Taiwan. Total Customers rose 7% year over year to 1.069m while Sales Leaders fell 5% to 64,200.
Outlook, commentary and risks
- Management expected ageLOC LumiSpa sales to generate approximately $100m of Q4 2017 revenue. The product launch began with limited availability in October, followed by Sales Leader previews in November and December and a broader market rollout through the first half of 2018. The previews were expected to produce less revenue than prior limited-time product offers.
- Management anticipated Q4 G&A expense approximately $10m above Q3, partly due to the October Nu Skin LIVE! event, and approximately $20m of additional 2017 capital expenditures. No full-year revenue or earnings guidance is stated in the provided filing text.
- Management believed cash, operating cash flow and existing credit lines would fund short- and long-term needs. It anticipated continuing quarterly dividends, subject to board discretion; the October-declared dividend was $0.36 per share. The company repurchased $47.8m of stock in the first nine months, with $151.9m remaining under its repurchase authorization.
- Regional risks include continuing weakness and customer-acquisition pressure in South Korea; declining Sales Leaders in Hong Kong/Taiwan; and a soft direct-selling market and challenging regulatory environment in Japan. The company also reported that Chinese restrictions on intercompany lending had slowed access to cash in that market; it held $110.8m in Chinese RMB cash at quarter-end.
- Vietnam authorities questioned whether an approximately $25 distributor account-transfer fee could violate anti-pyramid laws. Potential consequences include penalties or loss of the local business license; Vietnam contributed 1.0% of Q3 2017 consolidated revenue.
- Japanese customs assessments remain under appeal to the Japan Supreme Court. The company had already recorded the full disputed $31.4m charge in 2016 and said it was non-cash because the assessments had previously been paid. Management did not expect the outcome of other litigation, investigations or proceedings to materially affect consolidated results.
- In October 2017, the company announced significant planned changes to sales compensation plans over the coming quarters. Management cautioned that distributor reaction and business effects are uncertain. Broader risks include regulation of direct selling and earnings claims, foreign exchange, and tax examinations.
Important facts for investors to verify
- Whether LumiSpa achieves the anticipated Q4 revenue and how much reflects launch timing rather than sustained demand.
- Sales Leader and customer trends in South Korea and Hong Kong/Taiwan, and the durability of growth in the Americas and South Asia/Pacific.
- Progress and outcomes of the Japan customs appeals and Vietnam regulatory discussions.
- Implementation and market effects of planned compensation-plan changes, including regulatory developments affecting direct selling.
- Cash availability and repatriation constraints, debt maturities and covenant headroom, and the sustainability of dividends and share repurchases amid lower operating cash flow.