Nu Skin Enterprises, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Nu Skin is a direct-selling company operating in 51 markets, selling personal-care products under Nu Skin and nutritional supplements under Pharmanex.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $1,537.3 million | $1,331.1 million |
| Gross profit / margin | $1,264.8 million / 82.3% | $1,087.4 million / 81.7% |
| Operating income / margin | $217.1 million / 14.1% | $147.7 million / 11.1% |
| Net income | $136.1 million | $89.8 million |
| Diluted EPS | $2.11 | $1.40 |
| Cash from operations | $187.9 million | $133.9 million |
- Revenue increased 15%; management attributed growth to ageLOC product launches and distributor initiatives. Foreign-exchange movements added approximately 5% to reported revenue growth.
- Gross margin improved with higher-margin ageLOC sales and currency benefits. Selling expense was 42.1% of revenue; general and administrative expense was 26.1%.
- Year-end cash and cash equivalents were $230.3 million, working capital was $206.1 million, and total assets were $892.2 million. Cash and current investments were reported at $230.3 million.
- Debt totaled $160.9 million: $27.9 million current and $133.0 million long-term. The company reported compliance with debt covenants, including a $65 million minimum cash requirement.
- Capital expenditures were $53.8 million. Cash dividends paid were $31.2 million and share repurchases were $58.5 million.
- Q4 2010 revenue was $401.2 million, operating income $58.9 million, net income $37.3 million, and diluted EPS $0.58; Q4 2009 figures were $378.1 million, $52.2 million, $30.3 million, and $0.47, respectively.
Material changes and business trends
- Nu Skin product revenue rose to $913.8 million from $752.7 million; Pharmanex revenue increased to $612.2 million from $565.6 million. Nu Skin grew to 59.4% of revenue, while Pharmanex represented 39.8%.
- South Asia/Pacific grew 52% in reported dollars, Greater China 27%, North Asia 13%, and Europe 12%; Americas revenue declined 4%.
- Japan remained the largest market at $471.4 million, or about 31% of revenue. Local-currency revenue there fell 4%, despite a 2% increase in reported dollars; South Korea, China and South Asia/Pacific were key growth markets.
- Active distributors increased to approximately 799,000 from 761,000; executive distributors increased to 35,676 from 32,939.
- Cash from operations rose from $133.9 million to $187.9 million. Year-end cash increased from $158.0 million to $230.3 million.
Outlook, risks and unusual items
- Management expected 2011 gross margin to remain near the 2010 level and the effective tax rate to return to approximately 36.5%. It anticipated approximately $65 million of 2011 capital expenditures and a positive reported-revenue effect from currency at then-current exchange rates.
- Management anticipated modest local-currency revenue declines in Japan and continued U.S. softness in the first half of 2011, with possible improvement in the second half around the October global convention. It planned additional ageLOC product launches during 2011–2012.
- Two Japanese customs disputes involved approximately ¥5.3 billion ($65.3 million) of disputed assessments at year-end, plus a likely additional assessment of ¥0.6 billion ($7.7 million). An adverse outcome could require expenses of $33.2 million and $32.1 million for the respective disputes; the second dispute also involved amounts paid or held in bond and recorded as a long-term receivable.
- A California consumer group gave notice of a proposed Proposition 65 action alleging lead exposure from four products; the California Attorney General also raised a concern about lead in one product. Potential outcomes include warning labels, reformulation, discontinued California sales or civil fines.
- Key risks include foreign-exchange exposure, Japan regulatory scrutiny and distributor complaints, evolving Chinese direct-selling rules and licensing, product-claim and supplement regulation, reliance on significant third-party suppliers, distributor retention, and product liability. The company self-insures product liability risk.
- Nu Skin bought its Provo headquarters and warehouse from entities owned by certain officers and directors for approximately $33 million; about $17 million was payable in January 2011. The 2009 Japan restructuring charge of $10.7 million did not recur in 2010.
Important facts for investors to verify
- Progress and rulings in both Japanese customs disputes, including recovery of deposits and bonds and any resulting earnings charges.
- Whether ageLOC launches sustain repeat demand after launch-related purchasing, and whether distributor growth and productivity improve in Japan and the United States.
- Foreign-exchange effects on reported sales, margins and yen-denominated debt, given that approximately 86% of 2010 revenue came from outside the United States.
- Regulatory developments in Japan and China, including consumer complaints, Chinese licenses, and product registrations and claims.
- Supplier continuity and product quality, particularly for products sourced from concentrated or single-vendor arrangements.
- The company’s ability to fund planned capital spending, debt service, dividends and repurchases while maintaining covenant compliance.