Nu Skin Enterprises, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Nu Skin develops and distributes beauty and wellness products worldwide through its Nu Skin, Pharmanex and ageLOC brands, alongside its Rhyz Investments businesses.
Financial performance
- Revenue: $604.9 million, down 11% from $677.0 million; the decline was 8% on a constant-currency basis. Foreign exchange reduced reported revenue by 3%.
- Profit: Gross profit was $443.4 million, down from $506.5 million. Operating income was $52.1 million versus $62.9 million; net income was $38.7 million versus $47.4 million. Diluted EPS was $0.76 versus $0.91.
- Margins: Gross margin fell to 73.3% from 74.8%, mainly due to sales promotions. Core Nu Skin gross margin declined 1.3 percentage points to 76.5%. Selling expenses were 40.1% of revenue versus 40.8%; G&A was 24.6% versus 24.8%.
- Cash flow: Operating activities provided $7.5 million, compared with $18.9 million used in Q1 2021. Capital expenditures were $10.3 million. Cash and cash equivalents ended at $302.2 million, down from $339.6 million at year-end; cash plus current investments was $317.5 million.
- Liquidity and debt: Working capital was $354.8 million. Debt carrying value was approximately $369.0 million, comprising $300.0 million on the term loan and $70.0 million drawn on the revolving facility. The company was in compliance with debt covenants; the revolving facility expires April 2023.
- Capital returns: The company paid $19.3 million in dividends ($0.385 per share) and repurchased $10.0 million of shares during the quarter. $235.4 million remained available under the repurchase plan.
Material changes and operating trends
- Customers declined 13%, Paid Affiliates 14%, and Sales Leaders 22% year over year.
- Revenue declined in Mainland China (17%), the Americas (8%), South Korea (11%), Japan (12%), and EMEA (30%). Southeast Asia/Pacific grew 8% and Hong Kong/Taiwan grew 6%. EMEA’s constant-currency decline was 25%.
- Management cited COVID-related restrictions and lockdowns in eastern markets, continued softness in EMEA, and unfavorable currency movements. EMEA was also affected by Russia-Ukraine disruption. Russia and Ukraine together historically represented less than 1% of consolidated revenue.
- G&A expense decreased $19.0 million, primarily from lower employee incentive compensation and the prior-year comparison excluding $6.1 million of Grow Tech expense after the company exited that segment.
Outlook, risks and unusual items
- Management said COVID-related challenges in Mainland China were expected to persist through 2022 and that lost business momentum could weigh on the market for the rest of the year. It cited expected product launches, including ageLOC LumiSpa iO in the second half of 2022; no specific consolidated revenue or earnings guidance is provided in the supplied filing text.
- 2022 capital expenditures were estimated at $85–105 million. The company expected to complete a new Mainland China manufacturing plant in the second half of 2022; total project spending was expected to be $52–57 million.
- The company said it planned to refinance its credit facility during 2022. Four interest-rate swaps covered $200 million of variable-rate debt notional through July 2025.
- Following reports of COVID cases reportedly linked to an unauthorized marketer meeting in Wuhan, the company suspended Sales Leader meetings in Hubei, ceased operations at its Hubei branch office and cooperated with inquiries from Chinese market regulators and the Ministry of Commerce. Management said it believed the matters were nearly resolved; it also said the meeting suspension and lockdowns hurt Mainland China momentum.
- The 2021 Grow Tech exit resulted in $38.5 million of non-cash charges and $20.0 million of cash charges. The company paid $11.6 million of the related accrual in Q1 2022 and expected to pay the remaining $8.3 million in the first half of 2022.
- Risks include foreign-currency exposure, restrictions or delays in repatriating overseas cash, regulatory and direct-selling compliance, tax examinations and litigation. Management said existing cash, operating cash flows and credit lines should be adequate for short- and long-term needs. No material changes to previously disclosed risk factors or material legal-proceeding developments were reported.
Important facts for investors to verify
- Whether customer, affiliate and Sales Leader declines stabilize, and whether planned product launches translate into sustained sales.
- How Mainland China lockdowns, meeting restrictions and regulatory inquiries affect operations and revenue through 2022.
- Progress and cost of the Mainland China manufacturing plant, and actual capital spending against the $85–105 million estimate.
- Terms and completion of the planned credit-facility refinancing, covenant headroom and interest-rate exposure.
- Developments in foreign-currency movements, overseas cash repatriation, tax reviews and the remaining restructuring payments.