UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 |
| OR | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
|
NU SKIN ENTERPRISES, INC. (Exact name of registrant as specified in its charter) |
||
|
Delaware (State or other jurisdiction of incorporation) |
011-12421 (Commission File No.) |
87-0565309 (IRS Employer Identification No.) |
|
75 West Center Street Provo, UT 84601 (Address of principal executive offices) (801) 345-1000 (Registrant's telephone number, including area code) |
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes x
No ¨
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes x
No ¨
As of August 8, 2003, 36,374,253 shares of the Company’s Class A common stock, $.001 par value per share, and 44,189,344 shares of the Company’s Class B common stock, $.001 par value per share, were outstanding.
| PAGE | ||
| Part I. | Financial Information | |
| Item 1. Financial Statements: | ||
| Consolidated Balance Sheets | 1 | |
| Consolidated Statements of Income | 2 | |
| Consolidated Statements of Cash Flows | 3 | |
| Notes to Consolidated Financial Statements | 4 | |
| Item 2. Management's Discussion and Analysis of Financial | ||
| Condition and Results of Operations | 9 | |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 20 | |
| Item 4. Controls and Procedures | 20 | |
| Part II. | Other Information | |
| Item 1. Legal Proceedings | 20 | |
| Item 2. Changes in Securities | 21 | |
| Item 3. Defaults Upon Senior Securities | 21 | |
| Item 4. Submission of Matters to a Vote of Security Holders | 21 | |
| Item 5. Other Information | 22 | |
| Item 6. Exhibits and Reports on Form 8-K | 22 | |
| Signatures | 23 |
Nu Skin, Pharmanex and Big Planet are trademarks of Nu Skin Enterprises, Inc. or its Subsidiaries.
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NU SKIN ENTERPRISES, INC.
Consolidated Balance
Sheets
(in thousands)
| June 30, 2003 |
December 31, 2002 |
||||
|---|---|---|---|---|---|
| (Unaudited) | |||||
| ASSETS | |||||
| Current assets: | |||||
| Cash and cash equivalents | $ 113,650 | $ 120,341 | |||
| Accounts receivable | 16,028 | 18,914 | |||
| Inventories, net | 89,386 | 88,306 | |||
| Prepaid expenses and other | 46,073 | 48,878 | |||
| 265,137 | 276,439 | ||||
| Property and equipment, net | 56,568 | 55,342 | |||
| Goodwill | 118,768 | 118,768 | |||
| Other intangible assets, net | 67,542 | 69,181 | |||
| Other assets | 94,082 | 92,108 | |||
| Total assets | $ 602,097 | $ 611,838 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
| Current liabilities: | |||||
| Accounts payable | $ 15,686 | $ 17,992 | |||
| Accrued expenses | 50,042 | 77,808 | |||
| 65,728 | 95,800 | ||||
| Long-term debt | 81,077 | 81,732 | |||
| Other liabilities | 54,176 | 47,820 | |||
| Total liabilities | 200,981 | 225,352 | |||
| Stockholders' equity: | |||||
| Class A common stock - 500,000,000 shares authorized, $.001 | |||||
| par value, 36,108,131 and 35,707,785 shares issued | |||||
| and outstanding | 36 | 36 | |||
| Class B common stock - 100,000,000 shares authorized, $.001 | |||||
| par value, 44,189,344 and 45,362,854 shares issued | |||||
| and outstanding | 44 | 45 | |||
| Additional paid-in capital | 64,551 | 69,803 | |||
| Accumulated other comprehensive loss | (64,647 | ) | (68,988 | ) | |
| Retained earnings | 403,920 | 385,590 | |||
| Deferred compensation (Note 10) | (2,788 | ) | -- | ||
| 401,116 | 386,486 | ||||
| Total liabilities and stockholders' equity | $ 602,097 | $ 611,838 | |||
The accompanying notes are an integral part of these consolidated financial statements.
— 1 —
NU SKIN ENTERPRISES, INC.
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
| Three Months Ended June 30, 2003 | Three Months Ended June 30, 2002 | Six Months Ended June 30, 2003 | Six Months Ended June 30, 2002 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Revenue | $ 240,720 | $ 244,924 | $ 460,352 | $ 461,003 | |||||
| Cost of sales | 45,292 | 48,629 | 86,901 | 92,713 | |||||
| Gross profit | 195,428 | 196,295 | 373,451 | 368,290 | |||||
| Operating expenses: | |||||||||
| Distributor incentives | 97,492 | 96,567 | 185,528 | 179,400 | |||||
| Selling, general and administrative | 72,197 | 69,303 | 142,470 | 137,992 | |||||
| Total operating expenses | 169,689 | 165,870 | 327,998 | 317,392 | |||||
| Operating income | 25,739 | 30,425 | 45,453 | 50,898 | |||||
| Other income (expense), net | 965 | (1,800 | ) | 1,541 | (1,809 | ) | |||
| Income before provision for income taxes | 26,704 | 28,625 | 46,994 | 49,089 | |||||
| Provision for income taxes | 9,880 | 10,591 | 17,387 | 18,163 | |||||
| Net income | $ 16,824 | $ 18,034 | $ 29,607 | $ 30,926 | |||||
| Net income per share (Note 3): | |||||||||
| Basic | $ .21 | $ .22 | $ .37 | $ .38 | |||||
| Diluted | $ .21 | $ .22 | $ .36 | $ .37 | |||||
| Weighted average common shares | |||||||||
| outstanding: | |||||||||
| Basic | 80,403 | 81,785 | 80,589 | 82,085 | |||||
| Diluted | 81,561 | 83,568 | 81,890 | 83,439 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
— 2 —
NU SKIN ENTERPRISES, INC.
Consolidated Statements
of Cash Flows (Unaudited)
(in thousands)
| Six Months Ended June 30, 2003 | Six Months Ended June 30, 2002 | ||||
|---|---|---|---|---|---|
| Cash flows from operating activities: | |||||
| Net income | $ 29,607 | $ 30,926 | |||
| Adjustments to reconcile net income to net cash provided by | |||||
| operating activities: | |||||
| Depreciation and amortization | 10,954 | 10,772 | |||
| Amortization of deferred compensation | 325 | -- | |||
| Gain on sale | -- | (1,328 | ) | ||
| Changes in operating assets and liabilities: | |||||
| Accounts receivable | 2,886 | (5,261 | ) | ||
| Inventories, net | (1,080 | ) | (6,032 | ) | |
| Prepaid expenses and other | (3,957 | ) | 8,520 | ||
| Other assets | (4,249 | ) | (3,166 | ) | |
| Accounts payable | (2,306 | ) | 5,249 | ||
| Accrued expenses | (16,666 | ) | 7,026 | ||
| Other liabilities | 3,706 | 46 | |||
| Net cash provided by operating activities | 19,220 | 46,752 | |||
| Cash flows from investing activities: | |||||
| Purchase of property and equipment | (10,366 | ) | (8,537 | ) | |
| Purchase of long-term assets | -- | (6,473 | ) | ||
| Net cash used in investing activities | (10,366 | ) | (15,010 | ) | |
| Cash flows from financing activities: | |||||
| Exercise of distributor and employee stock options | 273 | 532 | |||
| Payments of cash dividends | (11,277 | ) | (9,830 | ) | |
| Repurchase of shares of common stock (Note 6) | (8,231 | ) | (6,974 | ) | |
| Net cash used in financing activities | (19,235 | ) | (16,272 | ) | |
| Effect of exchange rate changes on cash | 3,690 | 3,665 | |||
| Net increase (decrease) in cash and cash equivalents | (6,691 | ) | 19,135 | ||
| Cash and cash equivalents, beginning of period | 120,341 | 75,923 | |||
| Cash and cash equivalents, end of period | $ 113,650 | $ 95,058 | |||
The accompanying notes are an integral part of these consolidated financial statements.
— 3 —
NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| Nu Skin Enterprises, Inc. (the “Company”) is a leading, global, direct selling company that develops and distributes premium-quality, innovative personal care products and nutritional supplements through a large network of independent distributors. The Company also distributes technology and telecommunications products and services through its distributors. The Company reports revenue from five geographic regions: North Asia, which consists of Japan and South Korea; North America, which consists of the United States and Canada; Greater China, which consists of Mainland China, Hong Kong (including Macau) and Taiwan; South Asia/Pacific, which consists of Australia, Malaysia, New Zealand, the Philippines, Singapore and Thailand; and Other Markets, which consists of the Company’s markets in Brazil, Europe, Guatemala and Mexico (the Company’s subsidiaries operating in these countries are collectively referred to as the “Subsidiaries”). |
| The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited consolidated financial statements include the accounts of the Company and the Subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial information as of June 30, 2003, and for the three- and six-month periods ended June 30, 2003 and 2002. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. |
| The Company measures compensation expense for its stock-based employee compensation plans. SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options granted. The Company has chosen to account for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, because the grant price equals the market price on the date of grant for options issued by the Company, no compensation expense is recognized for stock options issued to employees. On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock Based Compensation – Transition and Disclosure. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. The Company will continue to account for its stock based compensation according to the provisions of APB Opinion No. 25. Had compensation cost for the Company’s stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed |
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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| by SFAS No. 123, as amended by SFAS No. 148, the Company’s net earnings and earnings per share would have been as follows (in thousands, except per share amounts): |
| Three Months Ended June 30, 2003 | Three Months Ended June 30, 2002 | Six Months Ended June 30, 2003 | Six Months Ended June 30, 2002 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Net income, as reported | $ 16,824 | $ 18,034 | $ 29,607 | $ 30,926 | |||||
| Deduct: Total stock-based employee | |||||||||
| compensation expense determined | |||||||||
| under fair value based method for | |||||||||
| all awards, net of related tax effects | (1,332 | ) | (1,415 | ) | (2,728 | ) | (2,693 | ) | |
| Pro forma net income | $ 15,492 | $ 16,619 | $ 26,879 | $ 28,233 | |||||
| Earnings per share: | |||||||||
| Basic - as reported | $ 0.21 | $ 0.22 | $ 0.37 | $ 0.38 | |||||
| Basic - pro forma | $ 0.19 | $ 0.20 | $ 0.33 | $ 0.34 | |||||
| Diluted - as reported | $ 0.21 | $ 0.22 | $ 0.36 | $ 0.37 | |||||
| Diluted - pro forma | $ 0.19 | $ 0.20 | $ 0.33 | $ 0.34 | |||||
| Net income per share is computed based on the weighted average number of common shares outstanding during the periods presented. Additionally, diluted earnings per share data gives effect to all potentially dilutive common shares that were outstanding during the periods presented. For the three- and six-month periods ended June 30, 2003, other stock options totaling 3.7 million and 3.6 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three- and six-month periods ended June 30, 2002, other stock options totaling 1.5 million and 2.9 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive. |
| In May 2003, the board of directors declared a quarterly cash dividend of $0.07 per share for all classes of common stock. This quarterly cash dividend of $5.6 million was paid on June 25, 2003, to stockholders of record on June 6, 2003. Quarterly cash dividends for the six-month period ended June 30, 2002 totaled $11.3 million. |
| The Company recognizes all derivatives as either assets or liabilities, with the instruments measured at fair value. Changes in the fair value of derivatives are |
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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| recorded each period in current earnings or other comprehensive income, depending on the intended use of the derivative and its resulting designation. The Company’s Subsidiaries enter into significant transactions with each other and third parties which may not be denominated in the respective Subsidiaries’ functional currencies. The Company seeks to reduce its exposure to fluctuations in foreign exchange rates through the use of foreign currency exchange contracts and through certain intercompany loans of foreign currency. The Company does not use such derivative financial instruments for trading or speculative purposes. The Company regularly monitors its foreign currency risks and periodically takes measures to reduce the impact of foreign exchange fluctuations on the Company’s operating results. Gains and losses on certain intercompany loans of foreign currency are recorded as other income and expense in the consolidated statements of income. |
| At June 30, 2003 and December 31, 2002, the Company held forward contracts designated as foreign currency cash flow hedges with notional amounts totaling approximately $91.0 million and $124.6 million, respectively, to hedge foreign currency intercompany transactions. All such contracts were denominated in Japanese yen. The net impact on foreign currency cash flow hedges recorded in current earnings were losses of $1.5 million and $2.8 million for the three- and six-month periods ended June 30, 2003, respectively, and were gains of $1.5 million and $3.8 million for the three- and six-month periods ended June 30, 2002, respectively. Those contracts held at June 30, 2003 have maturities through June 2004 and accordingly, all unrealized gains on foreign currency cash flow hedges included in other comprehensive income at June 30, 2003 will be recognized in current earnings over the next twelve-month period. |
| During the three-month periods ended June 30, 2003 and 2002, the Company repurchased approximately 235,000 and 429,000 shares of Class A common stock, respectively, for approximately $2.3 million and $5.6 million, respectively. During the six-month periods ended June 30, 2003 and 2002, the Company repurchased approximately 794,000 and 602,000 shares of Class A common stock, respectively, for approximately $8.2 million and $7.0 million, respectively. |
| The components of comprehensive income, net of related tax, for the three- and six-month periods ended June 30, 2003 and 2002, were as follows (in thousands): |
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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| Three Months Ended June 30, 2003 | Three Months Ended June 30, 2002 | Six Months Ended June 30, 2003 | Six Months Ended June 30, 2002 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Net income | $ 16,824 | $ 18,034 | $ 29,607 | $ 30,926 | |||||
| Other comprehensive income (loss), net of tax: | |||||||||
| Foreign currency translation adjustments | 2,109 | (5,849 | ) | 1,154 | (7,574 | ) | |||
| Net unrealized gains (losses) on foreign currency cash flow hedges | 1,377 | (5,968 | ) | 1,577 | (5,933 | ) | |||
| Net (gains) losses reclassified into current earnings | 854 | (788 | ) | 1,610 | (2,355 | ) | |||
| Comprehensive income | $ 21,164 | $ 5,429 | $ 33,948 | $ 15,064 | |||||
| The Company operates in a single reportable operating segment by selling products to a global network of independent distributors that operates in a seamless manner from market to market. The Company’s largest expense is the commissions paid on product sales through this distributor network. The Company manages its business primarily by managing this global distributor network. However, the Company does recognize revenue from sales to distributors in five geographic regions: North Asia, North America, Greater China, South Asia/Pacific and Other Markets. Revenue generated in each of these regions is set forth below (in thousands): |
| Three Months Ended June 30, 2003 | Three Months Ended June 30, 2002 | Six Months Ended June 30, 2003 | Six Months Ended June 30, 2002 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Region: | |||||||||
| North Asia | $ 152,037 | $ 154,242 | $ 287,331 | $ 285,487 | |||||
| North America | 31,702 | 34,550 | 62,964 | 69,573 | |||||
| Greater China | 30,021 | 26,025 | 57,074 | 48,288 | |||||
| South Asia/Pacific | 18,028 | 22,926 | 35,930 | 43,820 | |||||
| Other Markets | 8,932 | 7,181 | 17,053 | 13,835 | |||||
| Totals | $ 240,720 | $ 244,924 | $ 460,352 | $ 461,003 | |||||
| Additional information as to the Company’s operations in different geographical areas is set forth below (in thousands): |
|
Revenue Revenue from the Company’s operations in Japan totaled $137,467 and $136,579 for the three-month periods ended June 30, 2003 and 2002, respectively, and totaled $259,397 and $253,637 for the six-month periods ended June 30, 2003 and 2002, respectively. Revenue from the Company’s operations in the United States totaled |
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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| $29,418 and $32,487 for the three-month periods ended June 30, 2003 and 2002, respectively, and totaled $58,244 and $65,704 for the six-month periods ended June 30, 2003 and 2002, respectively. |
|
Long-lived
assets Long-lived assets in Japan were $18,607 and $20,210 as of June 30, 2003 and December 31, 2002, respectively. Long-lived assets in the United States were $275,025 and $276,030 as of June 30, 2003 and December 31, 2002, respectively. |
| In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. The Company is currently evaluating this standard, however, it does not believe it will have a significant effect on its financial statements. |
| In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. It is anticipated that the financial impact of SFAS 149 will not have a material effect on the Company. |