Nu Skin Enterprises, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Nu Skin is a global direct-selling company of personal-care products and nutritional supplements. Financial amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $682.9 million | $593.2 million | $1,233.0 million | $1,055.2 million |
| Gross profit | $571.7 million | $497.7 million | $1,031.7 million | $883.9 million |
| Operating income | $114.6 million | $97.9 million | $197.2 million | $169.6 million |
| Net income | $74.4 million | $60.4 million | $128.7 million | $108.2 million |
| Diluted EPS | $1.22 | $0.94 | $2.11 | $1.67 |
- Revenue increased 15% in Q2 and 17% in the first half; foreign exchange reduced reported revenue by 3% in both periods.
- Gross margin was 83.7% in Q2 and the first half, versus 83.9% and 83.8%, respectively, a year earlier. Selling expense was 45.2% of Q2 revenue and 44.7% for the first half; G&A was 21.7% and 23.0%, respectively.
- Effective tax rate was 34.4% in both 2013 periods, down from 36.1% in Q2 2012 and 36.3% in the first half of 2012.
- First-half operating cash flow was $188.9 million, compared with $168.4 million. Capital expenditures were $82.5 million, versus $30.1 million; cash increased to $402.7 million from $320.0 million at year-end. Cash plus current investments totaled $411.4 million.
- At June 30, current assets were $765.8 million and current liabilities $473.6 million; working capital was $292.2 million. Total debt was approximately $198.1 million, including $69.5 million current and $128.7 million long-term, compared with approximately $194.0 million at December 31, 2012.
Drivers and changes versus prior year
- Greater China: Revenue rose 35% in Q2 and 52% in the first half. Mainland China revenue rose 245% and 198%, respectively, while Hong Kong declined 67% and 56%. Q2 2012 comparisons included about $100 million of limited-time-offer sales in Hong Kong.
- North Asia: Revenue grew 11% in Q2 and 7% for the first half, led by South Korea growth of 58% and 34%. Japan revenue declined 14% and 9% in U.S. dollars, although local-currency revenue increased 5% and 9%.
- South Asia/Pacific: Revenue declined 13% in both periods, partly reflecting approximately $40 million of Q2 2012 limited-time-offer sales.
- Americas: Revenue increased 17% in Q2 and 16% for the first half; Latin American revenue increased 65% and 76%, respectively.
- Nu Skin product-line revenue grew to $417.5 million in Q2 from $295.1 million; Pharmanex revenue fell to $264.2 million from $296.3 million. Management cited growth in Actives and Sales Leaders: global counts increased 32% and 23%, respectively.
- EPS growth also benefited from share repurchases over the prior year. First-half 2013 repurchases were 0.4 million shares for $14.6 million, versus 2.5 million shares for $113.3 million in the first half of 2012.
Outlook, risks and contingencies
- The filing provides no specific revenue or EPS guidance. Management planned limited-time ageLOC TR90 launches across regions in the second half of 2013, with Greater China launches staged across Q3 and Q4 due to operating-capacity pressures.
- Management anticipated approximately $80 million of additional 2013 capital expenditures, principally for Provo and Shanghai facilities, China manufacturing expansion, stores and support centers, and technology. It stated that cash, operating cash flows and credit lines should be adequate for short- and long-term needs.
- In July, the board authorized a $400 million extension of the share-repurchase authorization. A $0.30-per-share quarterly dividend was also declared for payment in September; future dividends remain at the board’s discretion.
- Rapid Greater China growth is straining supply-chain, systems and staffing capacity. The company planned to triple its China stores and sales-support centers by 2015 and expand manufacturing. In July, China authorized expansion of direct-selling activities into additional provinces and districts.
- Japan’s regional regulator warned the company to address distributor-related concerns. The company added education, training and compliance measures; further complaints could lead to government action, sanctions or sales impacts.
- The company is disputing Japanese customs assessments and duties totaling approximately ¥4.3 billion ($44.1 million) as of June 30. It is pursuing the matter in Tokyo District Court and records additional payments or deposits as a receivable. An adverse outcome could result in a non-cash expense for the disputed amount.
- Other key risks include foreign-exchange exposure, China regulatory scrutiny, product-launch and supply-chain execution, product claims and industry regulation, and possible product shortages or returns. The stronger U.S. dollar reduced reported revenue in the period.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No updates to legal proceedings or risk factors were reported in Part II.
Important facts for investors to verify
- Whether Greater China’s exceptional growth can be sustained while the company scales supply, manufacturing, staffing and support infrastructure.
- The extent to which 2013 comparisons are affected by prior-year limited-time offers, and whether TR90 launch timing and demand affect other product sales.
- Trends in Japan, including local-currency sales, distributor compliance, regulatory scrutiny and the customs dispute’s eventual financial outcome.
- Cash conversion and working-capital needs, particularly the increase in inventory and capital spending, alongside debt maturities and planned shareholder returns.
- Foreign-exchange effects and regional growth trends, especially the contrast between South Korea and Japan and between Mainland China and Hong Kong.