Nu Skin Enterprises, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are U.S. dollars; financial statement amounts are in millions unless noted. Nu Skin develops and sells beauty and wellness products through a global direct-selling business, alongside Rhyz investment and manufacturing operations.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $537.8 | $641.2 | $1,703.3 | $2,022.2 |
| Gross profit | $364.3 | $482.2 | $1,220.2 | $1,520.8 |
| Operating income (loss) | $(20.3) | $65.4 | $83.4 | $213.7 |
| Net income (loss) | $(25.4) | $49.7 | $47.6 | $156.5 |
| Diluted EPS | $(0.51) | $0.97 | $0.94 | $3.03 |
- Revenue declined 16% year over year in both periods. Excluding foreign-exchange effects, revenue declined 9% in Q3 and 11% year to date. FX reduced reported revenue by 7% and 5%, respectively.
- Gross margin fell to 67.7% from 75.2% in Q3 and to 71.6% from 75.2% year to date. Management cited an incremental $26.9 million inventory write-off, increased promotions, and geographic and product mix.
- Q3 included $30.1 million of restructuring and impairment expense. Other expense was $8.7 million, including a $3.3 million unrealized investment loss. Q3 2021 other income included a nonrecurring $18.1 million equity-investment gain.
- Operating cash flow was $82.5 million for the first nine months, versus $32.1 million a year earlier. The improvement primarily reflected a $48.4 million inventory reduction; cash flow also reflected lower accrued expenses.
- Cash and cash equivalents were $294.1 million and current investments were $13.9 million at September 30. Working capital was $412.3 million. Total assets were $1.76 billion.
- Debt facilities had $397.5 million outstanding on the term loan and $30.0 million on the revolver; balance-sheet debt, net of issuance costs, totaled about $424.8 million. The variable rate shown was 4.88%. The company reported covenant compliance.
- Capital expenditures were $45.3 million year to date. Dividends paid were $58.0 million and share repurchases were $60.0 million year to date.
Material changes and business drivers
- Customer, Paid Affiliate, and Sales Leader counts declined 11%, 11%, and 22%, respectively, year over year. Mainland China was particularly weak: Q3 revenue declined 44% reported (41% constant currency); South Korea declined 27% reported.
- Management attributed softer-than-expected results to continued COVID-related disruption in Mainland China, South Korea, and Hong Kong; the Russia-Ukraine conflict affecting EMEA; and broad economic pressures. The conflict also contributed to weaker EMEA sales-force momentum.
- Southeast Asia/Pacific revenue increased 6% in Q3 and 9% year to date, supported in part by ageLOC Meta/Reset. Americas Q3 revenue was essentially flat; U.S. revenue grew 7%. Japan’s Q3 revenue declined 18% reported but grew 3% in local currency.
- The limited ageLOC LumiSpa iO introduction generated approximately $19.3 million in Q3 revenue. Management said general availability across markets was expected by the end of Q4 2022.
- Gross debt increased from the prior year-end following a June 2022 refinancing that replaced the prior credit agreement with a five-year $400 million term loan and $500 million revolving facility. The new facilities reference SOFR.
Outlook, risks, and unusual items
- A global strategic restructuring adopted in Q3 is expected to cost approximately $35–$45 million, including $30–$35 million of cash costs and about $9.9 million of non-cash impairments. Substantial completion is expected in the first half of 2023. Q3 charges were $30.1 million; $12.3 million remained accrued at quarter-end.
- Management estimated 2022 capital expenditures of $75–$95 million. It expected the Mainland China manufacturing plant to be completed in the first half of 2023; total project spending was estimated at $52–$57 million.
- Management believed cash, operating cash flows, and credit facilities would meet short- and long-term needs. It anticipated continued quarterly dividends, subject to board discretion and business and financial conditions. No clear revenue or earnings guidance for the year is provided in the filing text.
- Key exposures include sales-force retention and productivity, COVID and other public-health disruptions, foreign exchange, economic and geopolitical conditions, regulation of direct selling and product claims, and restrictions or delays in repatriating cash. Russia and Ukraine historically represented less than 1% of consolidated revenue; operations in Russia were closed and in Ukraine suspended.
- The company disclosed ongoing foreign tax examinations and general litigation, investigations, and regulatory contingencies; management did not expect these matters to have a material adverse effect, but outcomes may be uncertain. It also noted possible foreign-currency remittance constraints and $34.1 million of cash denominated in Chinese RMB.
Important facts for investors to verify
- Whether sales-force and customer declines, especially in Mainland China, stabilize and translate into improved revenue and segment contribution.
- Whether Q4 availability of LumiSpa iO and other product launches sustain demand without elevated discounting or further margin pressure.
- Actual restructuring costs, cash payments, impairment charges, and delivery of the expected savings and footprint optimization.
- Debt service and covenant headroom as variable rates change. The filing gives different maximum leverage ratios: 2.75-to-1.00 in the debt note and 2.25-to-1.00 in MD&A; confirm the applicable threshold.
- Inventory quality and levels, the cash-flow benefit from inventory reduction, and progress and spending on the China manufacturing plant.
- Potential foreign-exchange, tax, regulatory, litigation, and cash-repatriation developments, as well as the sustainability of dividends and buybacks amid lower earnings.