Nu Skin Enterprises, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Nu Skin develops and sells beauty and wellness products internationally through direct selling, alongside its Rhyz Investments businesses. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $560.6 million | $704.1 million | $1,165.5 million | $1,381.1 million |
| Gross margin | 73.6% | 75.6% | 73.4% | 75.2% |
| Operating income | $51.5 million | $85.4 million | $103.7 million | $148.3 million |
| Net income | $34.2 million | $59.3 million | $73.0 million | $106.8 million |
| Diluted EPS | $0.67 | $1.15 | $1.43 | $2.06 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $54.1 million | $1.9 million |
- Q2 revenue fell 20% reported and 15% at constant currency; first-half revenue declined 16% reported and 12% at constant currency. Currency movements reduced reported revenue by 5% and 4%, respectively.
- Q2 operating margin was approximately 9.2%, versus 12.1% a year earlier; net margin was approximately 6.1%, versus 8.4%. First-half operating and net margins were approximately 8.9% and 6.3%, versus 10.7% and 7.7%.
- At June 30, cash and cash equivalents were $363.9 million and current investments were $17.9 million. Current assets were $882.9 million and current liabilities $384.1 million; working capital was $498.8 million. The company reported compliance with its debt covenants.
- Debt facilities had $400 million outstanding on the term loan and $30 million drawn on the revolving facility. Balance-sheet debt carrying value was $427.2 million after issuance costs. The new credit agreement provides a $500 million revolving facility and $400 million term loan, each with a five-year term.
- First-half capital expenditures were $19.8 million. Approximate operating cash flow less capital expenditures was $34.3 million, compared with negative $35.0 million in the prior-year first half; this is a simple calculation, not a company-reported non-GAAP measure.
Material changes and business drivers
- Sales force indicators weakened year over year: Customers declined 6%, Paid Affiliates 16%, and Sales Leaders 24%. The filing describes these as Q2 core-business measures.
- Mainland China revenue fell 44% in Q2, primarily amid COVID-related lockdowns and disruption to selling and promotional activity. EMEA revenue fell 39%, with management citing the Russia-Ukraine conflict, weaker momentum and currency effects. Management said Ukraine operations were suspended and the Russia market was being closed.
- Southeast Asia/Pacific revenue rose 12% in Q2, supported by ageLOC Meta/Reset launches and easing restrictions. U.S. revenue increased 6% in Q2, while Manufacturing revenue declined 21% as customers reduced inventory.
- Gross margin pressure reflected promotions and product mix, including discounts on ageLOC LumiSpa devices ahead of the LumiSpa iO launch. Selling expense as a share of revenue improved modestly, but lower revenue reduced operating income.
- Q2 general and administrative expense fell $24.5 million, mainly due to lower employee incentive compensation and the prior exit from Grow Tech. Other expense worsened to $8.6 million, including a $5.7 million unrealized investment loss and higher foreign-currency losses, partly offset by a reduction in contingent consideration.
Outlook, risks and unusual items
- Management cited COVID-related conditions in China, geopolitical disruption in EMEA and the global economic downturn as headwinds, and said China challenges were expected to persist through 2022. Management expressed optimism about its EmpowerMe strategy and the expected second-half 2022 launch of ageLOC LumiSpa iO, while remaining cautious about near-term EMEA conditions.
- The company estimated 2022 capital expenditures of $70–$90 million. It expected construction of a new Mainland China manufacturing plant to finish in the second half of 2022; total project spending was estimated at $52–$57 million.
- On August 1, 2022, the company adopted a global restructuring and footprint-optimization plan, expected to be substantially completed by year-end. Estimated total charges are $35–$45 million, including $30–$35 million cash costs and $5–$10 million non-cash impairment charges. The filing also describes approximately $30 million of charges in Q3; verify the timing and allocation. No quantitative full-year revenue or EPS guidance is provided in the filing text.
- The company paid $38.7 million of dividends and repurchased $20.0 million of shares in the first half. A quarterly dividend of $0.385 per share was declared in August for payment in September. Management said it expected cash, operating cash flow and credit availability to cover needs, while noting it could reduce capital spending, repurchases or dividends if funding proved insufficient.
- Key exposures include direct-selling force retention and productivity, regulatory and tax requirements in international markets, China operating and repatriation restrictions, foreign-exchange volatility, and litigation or regulatory proceedings. Management said current claims were not expected to materially affect consolidated financial condition, results or cash flows. Foreign tax examinations remained ongoing in certain jurisdictions.
Important facts for investors to verify
- Confirm the applicable leverage covenant: the debt note states a maximum consolidated leverage ratio of 2.75 to 1.00, while MD&A states 2.25 to 1.00.
- Review the restructuring plan’s final charge estimate, Q3 versus second-half timing, cash/non-cash mix and execution progress.
- Track China lockdown and regulatory developments, the status of the Wuhan-related inquiries, and whether sales-force and revenue trends recover.
- Assess whether the LumiSpa iO launch and other product activity offset promotions, weaker gross margin and declining affiliate and Sales Leader counts.
- Monitor currency effects, overseas cash access and debt costs under the SOFR-based facilities; reported foreign-exchange impacts were material to revenue comparisons.