Nu Skin Enterprises, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; quarterly figures below include the fourth quarter ended that date. Amounts are U.S. dollars unless noted. The filing was signed February 12, 2020.
Business context
Nu Skin develops and sells personal-care and wellness products through direct selling in approximately 50 markets. Its principal brands include Nu Skin, Pharmanex and ageLOC. Approximately 87% of 2019 revenue came from outside the United States, and Mainland China accounted for about 30%. Rhyz, the company’s strategic investment arm, includes manufacturing and controlled-environment agriculture businesses.
Key financial results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $2,420.4 million | $2,679.0 million |
| Gross profit / margin | $1,839.0 million / 76.0% | $2,044.9 million / 76.3% |
| Operating income / margin | $267.4 million / 11.0% | $240.9 million / 9.0% |
| Net income | $173.6 million | $121.9 million |
| Diluted EPS | $3.10 | $2.16 |
| Cash from operations | $177.9 million | $202.7 million |
| Capital expenditures | $66.1 million | $70.4 million |
Revenue fell 10% year over year, or 7% at constant currency; foreign exchange reduced reported revenue by approximately 3%. Net income and EPS rose largely because 2018 included restructuring and impairment charges that reduced 2018 EPS by approximately $1.37. The 2019 effective tax rate was 32.0%, compared with 44.5% in 2018.
Fourth-quarter results
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Revenue | $583.4 million | $683.3 million |
| Gross profit | $442.8 million | $521.4 million |
| Operating income | $54.7 million | $18.4 million |
| Net income | $40.1 million | $(17.8) million |
| Diluted EPS | $0.72 | $(0.32) |
Q4 revenue declined approximately 15% year over year. The comparison in earnings was materially affected by the 2018 restructuring and impairment charges; the filing does not provide a standalone Q4 cash-flow figure.
Liquidity, debt and capital allocation
- At December 31, 2019, cash and cash equivalents plus current investments were $344.0 million, working capital was $383.4 million, and total assets were $1.77 billion.
- Debt was $365.0 million before debt issuance costs, including $27.5 million due within 12 months. The company had a $350 million revolving credit facility, with $49.5 million drawn at year-end. It reported compliance with debt covenants.
- Operating cash flow less capital expenditures was approximately $111.9 million. Operating cash flow declined from 2018, primarily reflecting payments of accrued restructuring costs and higher commissions.
- 2019 dividends totaled $82.2 million ($0.37 per share quarterly). The board approved a $0.375 quarterly dividend payable in March 2020. The company repurchased approximately 14,000 shares for $0.8 million in 2019; $470.2 million remained authorized.
- Cash and cash equivalents held outside the United States totaled $277.9 million, including $76.6 million denominated in Chinese RMB. Repatriation can be subject to local procedures and restrictions.
Material changes and management commentary
- Nu Skin segment revenue declined 11%; Mainland China revenue fell 18% to $722.5 million. Management cited restrictions on sales meetings, heightened government and media scrutiny, and weaker consumer sentiment. Sales Leaders in Mainland China fell 46% year over year.
- Worldwide Customers declined 7% to 1.16 million and Sales Leaders declined 25% to 54,760. Management also cited the absence of a major 2019 product launch and the rollout of changes to the Velocity sales compensation program.
- Manufacturing revenue increased 35% to $121.9 million, reflecting a partial-year comparison in 2018 following acquisitions. Grow Tech reported a $19.5 million segment contribution loss, and management expected continued losses in 2020.
- The 2018 restructuring program was completed in 2019. Its prior-year charges included $48.6 million of non-cash technology-asset impairments and $22.1 million of cash restructuring charges; an additional $7.2 million inventory write-off was recorded in cost of sales.
- The company plans to launch a new daily-use beauty device in the second half of 2020. It estimated 2020 capital expenditures of $60–70 million, including $15–18 million for a new Mainland China manufacturing plant. The expected 2020 effective tax rate was 31–37%.
Risks, contingencies and unusual items
- Coronavirus and China exposure: In January 2020, the company temporarily suspended in-person meetings in Mainland China. It expected a significant short-term impact, materially affecting the Mainland China segment and consolidated results in Q1, Q2 and full-year 2020; the financial impact could not then be reasonably estimated. Management also noted possible effects in Taiwan and Hong Kong.
- Regulatory and direct-selling risk: The company faces material risks from evolving direct-selling rules, product-claim restrictions, sales-force conduct and regulatory scrutiny, particularly in Mainland China. Changes in interpretation or enforcement could result in fines, interruptions, license loss or changes to its business model.
- Litigation: A consultant in the indoor-growing business claims a 50% ownership interest and profits, and seeks damages exceeding $250 million. The company disputes the claims and intends to defend itself. Its related federal declaratory-judgment action was dismissed on jurisdictional grounds; the company appealed, and it sought dismissal of the consultant’s state-court action.
- Other exposures: Foreign-currency movements, trade tensions, product and advertising regulation, supplier concentration, product liability, tax audits and cash-repatriation limits could affect results. Most product-liability risk is self-insured. Variable-rate debt is linked to LIBOR, whose transition could affect borrowing costs.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of year-end. Income taxes were identified as a critical audit matter.
Important facts for investors to verify
- Whether Mainland China’s meeting restrictions, regulatory scrutiny and coronavirus disruption materially changed sales, customer activity or licensed operations after the filing date.
- Whether revenue and Sales Leader trends stabilized across regions, and how much of earnings improvement reflects recurring operations versus the 2018 restructuring comparison.
- Whether the 2020 device launch, manufacturing expansion and Grow Tech investments met expected timing, demand and spending levels.
- Debt paydown, revolver usage, covenant headroom, cash accessibility outside the United States and the sustainability of dividends and repurchases.
- Developments in the $250 million-plus Roberts claim, tax audits and other legal, regulatory or product-related contingencies.