Nu Skin Enterprises, Inc. — Q1 2012 Form 10-Q
Business context and reporting period: Global direct-selling company of personal-care products and nutritional supplements, including Nu Skin and Pharmanex brands. This unaudited filing covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless stated otherwise.
Financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $462.0 million | $395.8 million |
| Gross profit / gross margin | $386.2 million / 83.6% | $295.2 million / 74.6% |
| Operating income | $71.7 million | $24.9 million |
| Net income | $47.8 million | $15.3 million |
| Diluted EPS | $0.74 | $0.24 |
| Cash provided by operating activities | $31.6 million | $42.3 million |
- Revenue grew 17%; currency fluctuations added approximately 1% to reported growth. Management attributed growth to ageLOC products and sales-force expansion.
- Q1 2011 included a $32.8 million non-cash Japan customs charge. Excluding that charge, management reported Q1 2011 gross margin of 82.8%, net income of $35.8 million and diluted EPS of $0.56. These are non-GAAP comparisons; on that basis, Q1 2012 earnings were higher but the increase was substantially less than the reported GAAP comparison suggests.
- Selling expenses were $202.5 million, or 43.8% of revenue, versus 42.7%; general and administrative expenses were $112.0 million, or 24.3%, versus 25.6%. Management cited supply-chain improvements and currency benefits for the higher gross margin; selling expense growth reflected distributor incentives.
- Cash and cash equivalents were $276.2 million at March 31; cash plus current investments totaled $289.9 million. Working capital was $312.0 million. Long-term debt, including its current portion, totaled $123.7 million, down from $136.6 million at December 31, 2011. The revolving and 2009 shelf credit facilities had no borrowings.
- Operating cash flow decreased year over year despite higher net income; the prior-year period included the non-cash customs charge, and Q1 2012 cash use included increased inventory and other operating assets. Capital expenditures were $14.6 million.
Markets and material changes
- Regional revenue: North Asia $182.2 million (+2%); Greater China $92.6 million (+35%); South Asia/Pacific $77.3 million (+55%); Americas $66.3 million (+19%); Europe $43.5 million (+4%). Greater China and South Asia/Pacific were the fastest-growing regions.
- Japan revenue declined 2% in reported dollars and 5% in local currency; management cited lower distributor counts and continued regulatory and media scrutiny. South Korea grew 8% in local currency.
- Management reported global active distributors up 8% and executive distributors up 11%. Product-line revenue was $249.5 million for Nu Skin and $210.3 million for Pharmanex.
- Other income was $3.6 million, compared with $0.4 million of expense a year earlier, primarily due to foreign-currency gains on yen-denominated debt and intercompany balances. The effective tax rate was 36.5%, versus 37.5%.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management anticipated approximately $85 million of additional capital expenditures for the remainder of 2012, mainly for facilities, retail-store improvements, and computer systems.
- After quarter-end, the company reported approximately $100 million of Greater China and $50 million of South Asia/Pacific limited-time-offer orders, expected to be fulfilled and recognized in Q2 and Q3. Revenue impact depends on fulfillment timing, cancellations, returns and cannibalization of other product sales.
- Management expected foreign-exchange fluctuations to have a slightly negative effect on 2012 reported revenue, based on then-current rates. It stated that existing cash, operating cash flows and available credit were expected to meet short- and long-term needs.
- A separate Japan customs dispute concerns approximately 4 billion yen ($52 million) of assessments and disputed duties for periods beginning in October 2006. The company is pursuing the matter in Tokyo District Court and records disputed deposits or payments as a long-term receivable; an adverse outcome could result in a non-cash expense. The separate $32.8 million assessment for 2002–2005 was charged in Q1 2011 and was under appeal.
- U.S. FDA review had detained three shipments of Galvanic Spa facial units; an adverse medical-device determination could restrict imports or sales pending clearance. Other principal risks include distributor retention, Japan market weakness and regulatory scrutiny, China direct-selling rules, product and claims regulation, customs duties, foreign exchange, and product supply or quality.
- The board declared a $0.20-per-share Q2 dividend and, on May 1, authorized a $250 million extension to the share-repurchase authorization. Q1 repurchases were $5.4 million.
Important facts for investors to verify
- Track the Japan customs litigation separately: the $52 million disputed-duty exposure is not the already-recorded $32.8 million historic charge.
- Check whether the announced limited-time-offer orders were fulfilled, recognized in the expected quarters, and affected by returns or cannibalization.
- Monitor FDA review and any resulting import, marketing or clearance requirements for Galvanic Spa products.
- Assess whether distributor growth and product launches can offset Japan weakness and sustain growth across regions.
- Compare operating cash flow, inventory, planned capital spending, debt repayment, dividends and repurchases with management’s liquidity expectations.