Business context and reporting period
Nu Skin Enterprises, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2016. The company sells personal care products and nutritional supplements through a global direct-selling network. Results are compared with the first quarter of 2015.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $471.8 million | $543.3 million; down 13% |
| Gross profit / margin | $334.0 million / 70.8% | $438.3 million / 80.7%; 2016 margin was 77.4% excluding Japan customs expense |
| Operating income | $8.1 million | $68.6 million |
| Net income | $3.3 million | $36.3 million; $23.4 million excluding Japan customs expense, a non-GAAP measure |
| Diluted EPS | $0.06 | $0.60; $0.42 excluding Japan customs expense, a non-GAAP measure |
| Operating cash flow | Used $2.7 million | Generated $74.2 million |
| Cash and current investments | $265.1 million | $303.7 million at December 31, 2015 |
| Debt | $263.1 million total carrying value | $249.6 million at December 31, 2015 |
| Working capital | $294.1 million | $298.8 million at December 31, 2015 |
Reported gross margin and earnings included a $31.4 million non-cash Japan customs charge, which was previously paid. Selling and administrative expenses fell in dollars, but general and administrative expense rose to 27.6% of revenue from 25.0% as sales declined. The effective tax rate was 37.3%, versus 35.7%.
Material changes versus the prior period
Revenue declined across most regions, with the largest reported regional declines in the Americas (18%), Greater China (15%) and North Asia (12%). Japan revenue rose 3% in U.S. dollars, but was approximately flat in local currency; South Korea fell 21%. Foreign exchange reduced total revenue by approximately 5%. Sales Leaders and Actives were down 5% and 7%, respectively, year over year.
Cash from operations swung from positive $74.2 million to negative $2.7 million. Management attributed the change mainly to payments of prior-year accrued items, including commissions on December 2015 offers, and inventory buildup for planned launches. Cash and current investments decreased by $38.6 million from year-end. The company paid $19.8 million in dividends, repurchased $20.0 million of stock, and made $10.9 million of capital expenditures during the quarter.
Outlook, commentary, risks and unusual items
- Management said the absence of major first-quarter product initiatives, between significant launches in late 2015 and planned second-quarter initiatives, weighed on sales force activity and revenue. It expects positive operating cash flow in Q2 2016, in line with historical levels, and anticipates approximately $45 million of additional 2016 capital expenditures.
- AgeLOC product offers and launches were planned or underway in several markets during Q2. The filing provides no specific revenue or earnings guidance.
- The Japan customs ruling was appealed to the Tokyo High Court. The $31.4 million charge covered disputed assessments and duties for prior periods.
- A proposed $47 million securities class-action settlement remained subject to court approval. The company recorded a liability and an equal receivable, expecting insurers to fund the settlement fully; it reported no net income impact.
- Risks include declining distributor activity, foreign-exchange movements, regulatory and direct-selling challenges (including in Japan and Mainland China), tax audits, and litigation. The company said it was in compliance with its debt covenants and believed cash, operating cash flow and credit lines would meet its needs. It also noted that cash repatriation can be subject to local requirements and U.S. taxes.
- The company declared a Q2 dividend of $0.355 per share. Future dividends and repurchases remain subject to board discretion and financial needs.
Important facts for investors to verify
- Whether the Japan customs appeal changes the recorded charge or creates further cash or earnings exposure.
- Whether the $47 million settlement receives court approval and is fully paid by insurers.
- Whether distributor counts, regional sales and revenue stabilize after the planned product initiatives.
- Whether operating cash flow turns positive in Q2 as management expects, given inventory, accrued payments and planned capital spending.
- Debt maturities, covenant headroom, and the company’s ability to sustain dividends and repurchases while cash balances decline.