Nu Skin Enterprises, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing; fourth-quarter figures are included below for context. Financial amounts are U.S. dollars.
Business context
Nu Skin develops and sells beauty and personal-care products under Nu Skin and nutritional products under Pharmanex, including products under the ageLOC brand. It operates in 54 markets, primarily through direct selling. Nearly 90% of 2015 revenue came from outside the United States. Mainland China was the largest market, at approximately 25% of revenue, and uses a distinct business model to comply with local regulations.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $2,247.0 million | $2,569.5 million | Down 13% |
| Gross profit / gross margin | $1,757.5 million / 78.2% | $2,091.1 million / 81.4% | Margin down 3.2 percentage points |
| Operating income / operating margin | $244.7 million / 10.9% | $352.2 million / 13.7% | Down 30% |
| Net income / net margin | $133.0 million / 5.9% | $189.2 million / 7.4% | Down 30% |
| Diluted EPS | $2.25 | $3.11 | Down 28% |
| Cash from operations | $322.1 million | $(56.5) million | Improved by $378.6 million |
| Cash, cash equivalents and current investments | $303.7 million | $300.2 million | Up $3.5 million |
| Working capital | $298.8 million | $416.3 million | Down $117.5 million |
- Revenue fell across most regions. Greater China revenue declined 19% to $771.6 million; North Asia fell 12% to $686.6 million; EMEA fell 24% to $137.2 million. Americas was essentially flat at $329.7 million, while South Asia/Pacific declined 2% to $322.0 million.
- Nu Skin product revenue was $1,363.5 million, down from $1,562.6 million; Pharmanex revenue was $877.9 million, down from $1,000.3 million.
- Foreign currency movements reduced reported revenue by approximately 8% year over year. Management also cited fewer major product initiatives in the first half and comparison with 2014 limited-time offers, which generated approximately $194 million.
- Gross margin was pressured by currency, promotions, a $37.9 million inventory write-down, and a $31.5 million reclassification of warehousing and shipping overhead from general and administrative expense to cost of sales. The prior-year inventory write-down was $50.0 million.
- Other expense, net, was $32.7 million, including $10.2 million of Venezuela currency charges and $17.0 million of foreign-currency translation expense. The 2014 amount was $53.7 million, including a $46.3 million Venezuela charge and $7.4 million debt-prepayment charge.
- Cash from operations rebounded from the 2014 outflow, which management attributed largely to payment of prior-year accrued expenses and inventory purchases. 2015 capital expenditures were $56.6 million; management expected approximately $60 million in 2016.
- At year-end, balance-sheet debt was $249.6 million, comprising $67.8 million current and $181.7 million long-term debt. Contractual debt obligations were $253.9 million before the $4.3 million debt discount. The company reported compliance with its leverage and interest-coverage covenants.
Fourth-quarter snapshot
Fourth-quarter 2015 revenue was $572.2 million, compared with $609.6 million in fourth-quarter 2014. Net income was $35.8 million versus $46.5 million, and diluted EPS was $0.62 versus $0.77. Operating income was $61.7 million versus $91.3 million.
Material changes, outlook and risks
- Actives fell 18% year over year to approximately 994,000, while Sales Leaders increased 9% to 67,575. Greater China Actives declined to 223,000; Greater China Sales Leaders increased to 27,064 from 24,537.
- Management said Mainland China stabilized during 2015 and reported fourth-quarter revenue there was 4% above the third quarter. It continued to prioritize rebuilding the sales force. The filing does not provide a quantitative revenue or earnings forecast for 2016.
- Management expected new-product introductions to support 2016 revenue and planned launches or wider availability of ageLOC Me and ageLOC Youth in multiple regions. It also expected the strong U.S. dollar to continue affecting results. These launches and limited-time offers may create uneven quarterly comparisons and inventory or supply-chain risks.
- China remains a material regulatory and execution risk. In 2014, adverse media and a government review led the company to suspend meetings and new representative applications temporarily; the review resulted in fines, and the disruption contributed to a significant loss of sales leaders and actives. Direct-selling licenses and product registrations remain subject to regulatory approvals and interpretation.
- The SEC had initiated a non-public formal investigation in April 2015 concerning matters related to a 2013 charitable donation in China. The company said it was cooperating; the SEC stated the investigation was not an indication of a violation.
- A securities class action and a related derivative suit concerning China-related disclosures and business practices remained outstanding. The class action motion to dismiss was denied; the derivative case was stayed pending the class action. The company said it could not estimate potential loss.
- A Japanese customs dispute involved approximately 4.3 billion yen, or $35.4 million, in assessments and disputed duties. A Tokyo District Court decision was anticipated in first-quarter 2016; an adverse outcome could result in a non-cash cost-of-sales charge. Separately, Taiwan authorities alleged improper sales of ageLOC Spa devices in 2011–2012; the subsidiary intended to contest the allegations.
- Other material risks include foreign-exchange exposure, product-claim and product-safety regulation, dependence on independent sales leaders and third-party suppliers, and possible inventory write-downs. Venezuela currency controls also restrict cash conversion and repatriation; year-end cash included $69.2 million denominated in Chinese RMB.
- The company paid $0.35 per share quarterly dividends in 2015 and approved a $0.355 quarterly dividend for March 2016. It repurchased approximately 3.8 million shares for $164.1 million during 2015; $446.9 million remained authorized under the new repurchase plan at year-end.
Most important facts for investors to verify
- Whether Mainland China revenue, Actives and Sales Leaders recover, and whether the stabilization described by management persists.
- Whether 2016 product launches generate repeatable demand beyond limited-time offers, without further inventory charges.
- The underlying sales trend after separating foreign-currency effects, product-launch timing and the 2015 overhead reclassification.
- Developments and potential financial exposure in the SEC investigation, China-related litigation, and Japanese customs dispute.
- Cash-flow sustainability, debt maturities and covenant headroom alongside planned dividends and share repurchases.
The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2015.