Nu Skin Enterprises, Inc. — Q1 2013 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, 2013. Financial statements are unaudited. The company reports one operating segment and revenue across five regions.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $550.1 million | $462.0 million | +19% |
| Gross profit / margin | $460.0 million / 83.6% | $386.2 million / 83.6% | Margin unchanged |
| Operating income | $82.7 million | $71.7 million | +15% |
| Net income | $54.3 million | $47.8 million | +13% |
| Diluted EPS | $0.90 | $0.74 | +22% |
| Operating cash flow | $70.4 million | $31.6 million | +$38.8 million |
Operating margin was approximately 15.0%, versus 15.5% a year earlier; net margin was approximately 9.9%, versus 10.4%. Selling expenses were 44.0% of revenue (43.8% prior year), and general and administrative expenses were 24.6% (24.3%). EPS benefited from repurchases of approximately 7% of outstanding shares over the prior year. Other income fell to $0.1 million from $3.6 million, largely because of lower foreign-currency gains. The effective tax rate declined to 34.4% from 36.5%, partly because some foreign earnings were designated indefinitely reinvested.
Regional revenue: Greater China $175.7 million, up 90%; North Asia $188.2 million, up 3%; Americas $76.5 million, up 15%; South Asia/Pacific $67.2 million, down 13%; and EMEA $42.4 million, down 3%. Mainland China revenue rose 144% to $124.1 million. Foreign exchange reduced total revenue growth by 3%; regional impacts varied.
Liquidity, cash flow and capital allocation
- Cash and cash equivalents were $325.7 million at March 31, 2013, versus $320.0 million at year-end; current investments were $8.5 million. Working capital was $259.9 million, down from $279.3 million.
- Total reported debt was approximately $195.3 million: $56.5 million current and $138.8 million long-term. Cash exceeded reported debt by approximately $130.4 million. The company drew $20 million on its revolving facility during the quarter; the facility commitment was temporarily increased to $100 million through February 2014.
- Operating cash flow was $70.4 million; capital expenditures were $41.2 million. Investing cash flow was negative $36.4 million and financing cash flow was negative $18.0 million. Cash increased $5.7 million, including a negative $10.3 million foreign-exchange effect.
- Q1 share repurchases totaled $14.6 million; $120.7 million remained available under the repurchase program. The company paid a $0.30-per-share dividend totaling $17.5 million and said it anticipates continued quarterly dividends, subject to board discretion.
Material changes, outlook and risks
- Management attributed growth to Greater China, North Asia and the Americas, product interest including ageLOC, and expansion in Sales Leaders and Actives (up 32% and 17% overall year over year). Total Actives were 1.002 million versus 860,000; Sales Leaders were 54,421 versus 41,214.
- Management anticipated approximately $129 million of additional capital expenditures for the remainder of 2013, mainly for stores and sales-support centers in Mainland China, a Provo innovation center and a Shanghai headquarters. This is about $20 million above the prior projection.
- Management expected difficult Q2 comparisons in Greater China and South Asia/Pacific because of prior-year limited-time product offers. In South Asia/Pacific, Q1 2012 included about $15 million of delayed shipments; excluding that amount, Q1 2013 revenue was up approximately 8%.
- Japan’s direct-selling environment remains challenging. The company received a regional regulatory warning regarding distributor activity and plans additional education, training and compliance measures, which could also affect sales.
- U.S. distribution of Galvanic Spa facial units remained suspended after the FDA refused admission of shipments pending possible medical-device clearance. An application for an alternative device was filed in September 2012; management estimated the process could take nine months to a year or longer.
- The company is contesting Japanese customs assessments and disputed duties totaling approximately 4.2 billion yen ($44.3 million) in Tokyo District Court. The related amounts are recorded as a long-term receivable; an adverse outcome could result in a non-cash expense for the disputed assessments.
- Other key risks include currency movements, evolving direct-selling and product regulations, scrutiny of Mainland China operations, distributor retention and productivity, product-launch execution, supply constraints, and product claims or quality issues. Management stated it believes existing cash, operating cash flows and credit lines are sufficient for near- and long-term needs.
Important facts for investors to verify
- Whether Greater China’s rapid growth and distributor expansion are sustainable, especially against the anticipated tougher Q2 comparison.
- Progress and potential sales impact of the Japan compliance response and U.S. facial-device clearance process.
- Outcome and accounting exposure of the approximately $44.3 million Japanese customs dispute.
- Execution, funding and returns associated with the higher 2013 capital-spending plan, alongside dividends and repurchases.
- Exposure to foreign exchange: reported Q1 revenue was negatively affected overall, and the yen’s weakening materially reduced Japan revenue in U.S. dollars.