Nu Skin Enterprises, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing was signed March 18, 2014. This summary also includes reported fourth-quarter results.
Business context
Nu Skin develops and sells premium personal-care products and nutritional supplements through direct selling in 53 markets. FY 2013 revenue reached a record $3.177 billion; approximately 92% was generated outside the United States. Mainland China was the largest individual market, contributing about $1.005 billion, or 32% of revenue. The broader Greater China region contributed $1.363 billion, or 43%.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $3,176.7 million | $2,132.3 million | +49% |
| Gross profit / margin | $2,670.9 million / 84.1% | $1,779.1 million / 83.4% | Margin +0.7 percentage points |
| Operating income / margin | $554.1 million / 17.4% | $340.8 million / 16.0% | Margin +1.4 percentage points |
| Net income | $364.9 million | $221.6 million | +65% |
| Diluted EPS | $5.94 | $3.52 | +69% |
| Cash from operations | $530.2 million | $311.0 million | +$219.2 million |
| Capital expenditures | $185.1 million | $96.6 million | +$88.5 million |
Fourth quarter: Revenue was $1,055.8 million versus $579.2 million in Q4 2012; net income was $125.3 million versus $59.2 million; diluted EPS was $2.02 versus $0.97.
Revenue mix and growth drivers: Nu Skin products generated $1.642 billion and Pharmanex products $1.529 billion. AgeLOC TR90 limited-time offers generated approximately $550 million in the second half, including about $327 million in Greater China. Management cited product demand and growth in the sales network; worldwide Sales Leaders increased 97% and Actives increased 41% year over year.
Liquidity and debt: Year-end cash and cash equivalents were $525.2 million, with $22.0 million of current investments; combined cash and current investments were $547.1 million. Working capital was $341.5 million. Total debt was $181.7 million, including $67.8 million current and $113.9 million long-term. The company reported compliance with debt covenants, including a $65.0 million minimum-cash requirement. Operating cash flow increased, partly reflecting higher accrued expenses, while inventory rose to $339.7 million from $135.9 million.
FY 2013 dividends were $0.30 per share quarterly. The board approved a $0.345 quarterly dividend for March 2014, equivalent to $1.38 annually. The company repurchased approximately $140.9 million of shares during 2013. Planned 2014 capital expenditures were approximately $180 million.
Material changes versus prior periods
- Revenue grew 49% in FY 2013 versus 24% in FY 2012. Greater China revenue increased 148%; Mainland China revenue rose 292% to $1.005 billion. Growth included substantial limited-time-offer sales.
- Japan revenue declined 18% in U.S. dollars, primarily due to yen weakness; local-currency revenue increased 1%. South Korea revenue rose 58%, while South Asia/Pacific, Americas and EMEA grew 15%, 30% and 7%, respectively.
- Gross margin improved to 84.1%. Selling expenses rose to 46.5% of revenue from 43.7%, reflecting commissions and incentives associated with limited-time offers. General and administrative expenses fell to 20.2% of revenue from 23.7% as revenue grew faster than overhead.
- Foreign currency movements reduced reported revenue by approximately 3% year over year. Management attributed higher net income to revenue growth, improved margins and expense control.
- Prior-year presentations were revised for selling-rebate classification, reducing both revenue and selling expense by $24.4 million in 2011 and $37.4 million in 2012, with no effect on operating income, net income or cash flows. Deferred-tax balance-sheet classifications were also revised without effect on equity or results; the company said the revisions were not material.
Outlook, risks and unusual items
- Mainland China regulatory and reputation risk: After January 2014 media allegations, Chinese regulators made inquiries and investigations. The company voluntarily suspended promotional meetings and new sales-representative applications and expanded refund and return policies. It expected near-term revenue and sales-network declines, said fines were likely, and identified possible recruitment or sales suspensions and license loss as potential sanctions. The internal review was ongoing; no related costs had been accrued at year-end.
- Litigation: Five purported securities class actions and a shareholder derivative suit were filed in 2014 concerning China operations and related disclosures. The company said it intended to defend the claims. These matters were at an early stage, and outcomes were uncertain.
- Japan customs dispute: A separate ongoing dispute concerned approximately ¥4.2 billion, or $40.2 million, in assessments and disputed duties. The company was pursuing the matter in Tokyo District Court and recorded the disputed deposits or payments as a long-term receivable; an unfavorable outcome could require a non-cash expense. A prior Japan customs matter had been closed after the Supreme Court declined review; the full $32.8 million expense had been recorded in 2011.
- Management outlook: The company forecast a 2014 effective tax rate of approximately 34.0%–35.5%, capital expenditures of about $180 million, and additional regional limited-time offers for TR90 and Tru Face Essence Ultra. It gave no clear full-year revenue or EPS guidance in the provided filing text. Management warned that China-related disruption could raise expense ratios and that adjusted launch plans could lead to excess inventory and write-offs.
- Other principal risks: Direct-selling and product-claim regulation, sales-force conduct and retention, product safety and liability (the company self-insured product liability risk), foreign exchange, supply-chain dependence, and restrictions on cash repatriation. About $256 million was held in Chinese yuan and approximately $34 million in Venezuela was subject to currency controls.
- The independent auditor issued an unqualified opinion on the financial statements and found internal control over financial reporting effective as of December 31, 2013.
Investor verification priorities
- Track the outcome of Chinese regulatory inquiries, the internal review, any sanctions, and the pace of recovery in Mainland China revenue, Actives and Sales Leaders.
- Assess how much FY 2013 growth and cash generation depended on TR90 limited-time offers; verify repeat purchases, returns, inventory levels and any product-line cannibalization.
- Follow the $40.2 million Japan customs dispute, related deposits and potential earnings exposure.
- Reconcile operating cash flow with the sharp increases in accrued expenses and inventory, and monitor planned capital spending, dividends, repurchases and debt maturities.
- Evaluate foreign-exchange sensitivity and the availability of cash held in China and Venezuela, alongside the company’s stated tax and repatriation assumptions.