Nu Skin Enterprises, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Nu Skin develops and sells beauty, personal-care and nutritional products through direct selling in approximately 50 markets. About 90% of FY2017 revenue came from outside the U.S.; Mainland China accounted for 32%.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $2.279 billion | $2.208 billion |
| Gross profit / gross margin | $1.777 billion / 78.0% | $1.707 billion / 77.3% |
| Operating income / operating margin | $274.5 million / 12.1% | $231.1 million / 10.5% |
| Net income / net margin | $129.4 million / 5.7% | $143.1 million / 6.5% |
| Diluted EPS | $2.36 | $2.55 |
| Cash from operations | $302.6 million | $275.3 million |
| Cash, cash equivalents and current investments at year-end | $438.2 million | $368.1 million |
| Working capital at year-end | $330.4 million | $315.3 million |
Fourth quarter: Revenue was $666.2 million, versus $531.3 million in Q4 2016. Operating income was $99.1 million, net income $18.2 million, and diluted EPS $0.33. The quarter’s results included the initial ageLOC LumiSpa launch.
Debt and capital returns: Balance-sheet debt carrying value was approximately $388.6 million, including current and long-term debt; contractual debt maturities totaled $401.8 million before discounts. The $210 million 4.75% convertible notes mature in June 2020. FY2017 capital expenditures were $60.2 million; the company repurchased $71.7 million of shares and paid $76.1 million in dividends.
Changes and drivers
- Annual revenue increased about 3%; reported constant-currency growth was also 3%. Growth was led by Mainland China (+17%), the Americas (+15%) and EMEA (+9%). South Korea (-13%), Japan (-8%) and Hong Kong/Taiwan (-9%) declined.
- Nu Skin product-category revenue rose to $1.456 billion from $1.308 billion; Pharmanex revenue fell to $817.2 million from $892.7 million.
- Sales Leaders increased 33% to 81,900 and Customers increased 8% to 1.07 million. Management said the year-end Sales Leader increase was partly driven by LumiSpa launch offers and expected the count to decline in Q1 2018.
- Gross margin improved partly because FY2016 included a $31.4 million non-cash Japan customs charge. LumiSpa’s comparatively lower margin partly offset the improvement.
- Net income fell despite higher operating income, principally because the U.S. tax reform produced a $47.7 million non-cash tax charge; the effective tax rate rose to 51.3% from 32.8%. Diluted EPS also reflected lower weighted-average shares following repurchases.
Outlook, risks and unusual items
- Management expected a 2018 effective tax rate of approximately 34–35%, excluding discrete items; the estimate and the FY2017 tax accounting were provisional and could change. Management said the full effect of the Tax Reform Act, including GILTI, was still under evaluation.
- Nu Skin planned general availability of ageLOC LumiSpa across markets in the first half of 2018. It estimated 2018 capital expenditures of about $70 million and anticipated that three 2018 acquisitions would reduce gross margin by approximately 1% going forward.
- In January and February 2018, the company acquired the remaining interests in Innuvate and Treviso and acquired L&W Holdings, adding nutrition, personal-care manufacturing and packaging capabilities. Purchase accounting was not yet complete.
- Key risks include direct-selling and product-claim regulation, especially in Mainland China; reliance on Sales Leaders and product launches; foreign-currency exposure; supplier and product-registration risks; and competition. The company held $204.4 million in Chinese RMB, subject to local repatriation procedures.
- Vietnam regulators questioned whether an approximately $25 distributor account-transfer fee could constitute an illegal sign-up fee; Vietnam represented 0.8% of 2017 revenue. A Japan customs assessment appeal remained pending before the Supreme Court after lower-court rulings against the company; the $31.4 million charge had already been recorded in 2016.
- The board approved a quarterly dividend increase to $0.365 per share for payment in March 2018. Future dividends remain subject to board discretion.
Important facts for investors to verify
- Whether LumiSpa demand persists after launch offers and whether the expected Q1 Sales Leader decline occurs.
- How the compensation-plan changes and related product price increases affect sales, retention and selling expenses.
- The final tax-reform accounting, the 2018 effective tax rate, and any outcomes from tax examinations, including the preliminary Indonesia assessment.
- The status and potential financial impact of the Japan customs appeal and the Vietnam regulatory matter.
- Acquisition consideration, integration results and the anticipated gross-margin effect once purchase accounting is finalized.
- Debt repayment and liquidity capacity, particularly ahead of the convertible notes’ 2020 maturity, alongside planned dividends, repurchases and capital spending.