Nu Skin Enterprises, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Global direct-selling company of personal-care products and nutritional supplements, reporting for the three months ended March 31, 2019. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. Comparisons are with Q1 2018 unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $623.6 | $616.2 |
| Gross profit / gross margin | $477.0 / 76.5% | $469.9 / 76.3% |
| Operating income / operating margin | $68.7 / 11.0% | $59.0 / 9.6% |
| Net income | $43.0 | $35.5 |
| Diluted EPS | $0.77 | $0.64 |
| Operating cash flow | $(8.2) | $(1.1) |
| Capital expenditures | $13.8 | $12.7 |
- Revenue grew 1% as reported and 7% at constant currency; foreign exchange reduced Q1 2019 revenue by 6%. Net income rose about 21% and diluted EPS 20%.
- Selling expense fell to 40.0% of revenue from 41.8%; G&A increased to 25.4% from 24.9%. Other expense was $2.8 million, versus $1.2 million of other income.
- Effective tax rate was 34.7%, down from 41.0%, primarily because Q1 2018 included additional Indonesia tax reserves.
- Cash and cash equivalents were $310.3 million at March 31, down from $386.9 million at year-end; cash plus current investments was $318.3 million. Working capital was $345.6 million, versus $359.6 million at year-end.
- Balance-sheet debt was approximately $401.2 million, comprising $45.0 million current and $356.2 million long-term. Credit-facility principal balances were $380 million term debt and $25 million revolving debt. The company reported compliance with its leverage and interest-coverage covenants.
- Operating cash flow was negative mainly due to payment of year-end accruals, particularly restructuring severance. Financing cash outflow included $134.5 million of debt payments and $20.5 million of dividends; the company also borrowed $105.0 million.
Material changes and business trends
- Nu Skin geographic-segment revenue declined 1% reported but grew 5% at constant currency. Mainland China revenue rose 6% reported (12% constant currency); Americas/Pacific fell 6% reported; South Korea fell 6%; EMEA fell 7% reported but grew 1% constant currency.
- LumiSpa revenue was approximately $75 million, compared with $43 million a year earlier. Mainland China LumiSpa revenue was about $39 million versus $5 million.
- Customers increased 10% to 1.19 million; Sales Leaders were essentially flat at 63,248. Manufacturing revenue increased to $29.3 million from $17.2 million, largely because the prior-year period included only partial-quarter sales after acquisitions.
- Segment contribution increased to $137.8 million from $120.8 million. Mainland China contribution improved; EMEA contribution declined. Grow Tech posted a $3.6 million segment loss, and management expected continued losses in 2019 while it develops the initiative.
- Management attributed improved gross margin to core-business product mix, cost reductions, and products sourced through owned manufacturing entities, partly offset by the manufacturers’ lower margins. Lower selling expenses as a share of revenue also supported operating income.
Outlook, risks, and notable items
- No specific consolidated revenue or earnings guidance is provided in the filing. Management estimated $65–70 million of capital expenditures for the remainder of 2019 and expected $20–30 million during 2019 for a planned Mainland China manufacturing plant, with total project spending of about $55 million over two to three years.
- Management believed cash, operating cash flows, and available credit would meet short- and long-term needs. It anticipated continued quarterly dividends, subject to board discretion; a $0.37-per-share dividend was declared for payment in June 2019.
- Mainland China’s 100-day government review of health-product and direct-selling industries had ended, but management expected heightened scrutiny to continue. Restrictions on meetings, inquiries, complaints, negative media coverage, and uncertainty about regulatory changes could delay initiatives or adversely affect sales and operations.
- Other cited business risks include currency volatility, competitive pressure in South Korea, a soft direct-selling market and regulatory challenges in Japan, and Argentina’s hyperinflationary environment. Foreign exchange was a material headwind in Q1.
- Litigation, investigations, and tax matters are ongoing in the ordinary course; management did not expect current proceedings to materially affect consolidated results. Foreign tax examinations remained underway, and unrecognized tax benefits could increase by an estimated $0.5–1.5 million over the next 12 months.
- Q1 2018 included unusual noncash items: a $13.6 million gain from step acquisitions and a $7.2 million debt-extinguishment charge. The company adopted lease accounting effective January 1, 2019, recording $117.3 million of operating right-of-use assets and $120.0 million of lease liabilities; this affected balance-sheet comparability and working capital.
Most important facts for investors to verify
- Whether Mainland China scrutiny, meeting restrictions, or regulatory changes affect sales, licenses, or planned initiatives.
- Whether customer growth and LumiSpa demand persist, and whether Sales Leader trends improve as Velocity is implemented.
- Whether operating cash flow recovers after restructuring-related payments and working-capital outflows.
- Debt repayment, revolving-credit usage, covenant headroom, and the funding of dividends, repurchases, and planned capital expenditures.
- The contribution and margins of acquired manufacturing operations, and the costs, progress, and expected returns of Grow Tech and the proposed China plant.
- The ongoing effects of foreign exchange, Argentina’s inflation, and tax examinations on reported results and cash availability.