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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

    (Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
     
   OR
     
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 011-12421

   NU SKIN ENTERPRISES, INC.
(Exact name of registrant as specified in its charter) 		  
        
Delaware
(State or other jurisdiction
of incorporation or organization) 		 
   		87-0565309
 (IRS Employer
Identification Number)
   75 West Center Street
Provo, UT 84601
(Address of principal executive offices and zip code)

(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 May 1, 2004, 71,478,517 shares of the registrant’s Class A common stock, $.001 par value per share and no shares of the registrant’s Class B common stock were outstanding.

NU SKIN ENTERPRISES, INC.

2004 FORM 10-Q QUARTERLY REPORT – FIRST QUARTER

TABLE OF CONTENTS




    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 21
  Item 2.       Changes in Securities, Use of Proceeds and Issuer Purchases of Equity 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 21
  Item 6.       Exhibits and Reports on Form 8-K 22
  Signature 23




Nu Skin, Pharmanex and Big Planet are trademarks of Nu Skin Enterprises, Inc. or its subsidiaries.




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PART I.       FINANCIAL INFORMATION

ITEM 1.         FINANCIAL STATEMENTS

NU SKIN ENTERPRISES, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)


March 31,
2004
  December 31,
2003
 
(Unaudited) 
ASSETS      
Current assets 
     Cash and cash equivalents  $               135,363   $               122,568  
     Accounts receivable  18,123   15,054  
     Inventories, net  93,862   83,338  
     Prepaid expenses and other  51,151   60,163  
   298,499   281,123  
   
Property and equipment, net  61,870   60,528  
Goodwill  118,768   118,768  
Other intangible assets, net  66,568   67,572  
Other assets  58,170   63,068  
     Total assets  $               603,875   $               591,059  
   
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities 
     Accounts payable  $                 17,676   $                 18,816  
     Accrued expenses  91,682   95,068  
     Current portion of long-term debt  18,287   17,915  
   127,645   131,799  
   
Long-term debt  149,723   147,488  
Other liabilities  21,202   21,524  
     Total liabilities  298,570   300,811  
   
Stockholders' equity 
     Class A common stock - 500,000,000 shares authorized, $.001 par value, 
             71,366,316 and 70,700,497 shares issued and outstanding  71   71  
     Additional paid-in capital  (61,411 ) (68,191 )
     Accumulated other comprehensive loss  (71,492 ) (70,849 )
     Retained earnings  440,341   431,615  
     Deferred compensation  (2,204 ) (2,398 )
   305,305   290,248  
         Total liabilities and stockholders' equity  $               603,875   $               591,059  

The accompanying notes are an integral part of these consolidated financial statements.

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NU SKIN ENTERPRISES, INC.
Consolidated Statements of Income (Unaudited)
(in thousands, except per share amounts)


Three
Months Ended
March 31,
2004
  Three
Months Ended
March 31,
2003
 
Revenue   $               263,988   $               219,632  
Cost of sales  43,923   41,609  
   
Gross profit  220,065   178,023  
   
Operating expenses: 
      Selling expenses  112,582   88,036  
      General and administrative expenses  83,634   70,273  
   
Total operating expenses  196,216   158,309  
   
Operating income  23,849   19,714  
Other income (expense), net  (865 ) 576  
   
Income before provision for income taxes  22,984   20,290  
Provision for income taxes  8,504   7,507  
   
Net income  $                 14,480   $                 12,783  
   
Net income per share (Note 3): 
      Basic  $                     0.20   $                    0.16  
      Diluted  $                     0.20   $                    0.16  
   
Weighted average common shares outstanding: 
      Basic  70,691   80,790  
      Diluted  72,467   82,207  



The accompanying notes are an integral part of these consolidated financial statements.

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NU SKIN ENTERPRISES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)


Three
Months Ended
March 31,
2004
  Three
Months Ended
March 31,
2003
 
Cash flows from operating activities:      
    Net income  $                 14,480   $                 12,783  
    Adjustments to reconcile net income to net cash provided by 
        operating activities: 
            Depreciation and amortization  6,083   5,457  
            Amortization of deferred compensation  194   130  
            Changes in operating assets and liabilities: 
                 Accounts receivable  (3,069 ) 2,234  
                 Inventories, net  (10,524 ) (3,484 )
                 Prepaid expenses and other  5,824   (1,153 )
                 Other assets  868   (875 )
                 Accounts payable  (1,140 ) 4,326  
                 Accrued expenses  4,334   (22,450 )
                 Other liabilities  363   3,608  
   
     Net cash provided by operating activities  17,413   576  
   
Cash flows from investing activities: 
    Purchase of property and equipment  (5,930 ) (6,179 )
   
    Net cash used in investing activities  (5,930 ) (6,179 )
   
Cash flows from financing activities: 
    Exercise of distributor and employee stock options  5,034   178  
    Payments of cash dividends  (5,754 ) (5,647 )
    Repurchase of shares of common stock  —   (5,946 )
   
    Net cash used in financing activities  (720 ) (11,415 )
   
Effect of exchange rate changes on cash  2,032   544  
   
    Net increase (decrease) in cash and cash equivalents  12,795   (16,474 )
   
Cash and cash equivalents, beginning of period  122,568   120,341  
   
Cash and cash equivalents, end of period  $               135,363   $               103,867  

The accompanying notes are an integral part of these consolidated financial statements.

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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Finanical Statements


1. THE COMPANY

  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 that are sold worldwide under the Nu Skin and Pharmanex brands. The Company also markets technology products and services under the Big Planet brand. The Company reports revenue from five geographic regions: North Asia, which consists of Japan and South Korea; Greater China, which consists of Mainland China, Hong Kong and Taiwan; North America, which consists of the United States and Canada; South Asia/Pacific, which consists of Australia, Malaysia, New Zealand, the Philippines, Singapore and Thailand; and Other Markets, which consists of 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 March 31, 2004, and for the three-month periods ended March 31, 2004 and 2003. 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, 2003.

2. STOCK–BASED COMPENSATION

  The Company measures compensation expense for its stock-based employee compensation plans. Statements of Financial Accounting Standards (“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 granted to employees 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. However, stock-based compensation granted to non-employees, such as the Company’s independent distributors and consultants, is accounted for in accordance with SFAS No. 123. On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amended SFAS No. 123. 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

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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Finanical Statements


  granted to employees 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 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
March 31, 2004
  Three
Months Ended
March 31, 2003
 
Net income, as reported   $               14,480   $               12,783  
Deduct:    Total compensation expense determined
                  under fair value based method for all
                  options, net of related tax effects		  (1,551 ) (1,396 )
   
Pro forma net income  $               12,929   $               11,387  
   
Earnings per share: 
    Basic — as reported  $                   0.20   $                   0.16  
    Basic — pro forma  $                   0.18   $                   0.14  
   
    Diluted — as reported  $                   0.20   $                   0.16  
    Diluted — pro forma  $                   0.18   $                   0.14  

3. NET INCOME PER SHARE

  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-month periods ended March 31, 2004 and 2003, other stock options totaling 0.8 million and 3.6 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive. Earnings per share were positively impacted by the repurchase of 10.8 million shares of our Class A common stock, which occurred in October 2003.

4. DIVIDENDS PER SHARE

  In January 2004, the board of directors declared a quarterly cash dividend of $0.08 per share for all classes of common stock. This quarterly cash dividend of approximately $5.8 million was paid on March 24, 2004, to stockholders of record on March 5, 2004.

5. DERIVATIVE FINANCIAL INSTRUMENTS

  At March 31, 2004 and December 31, 2003, the Company held forward contracts designated as foreign currency cash flow hedges with notional amounts totaling approximately $82.4 million and $64.3 million, respectively, to hedge foreign-currency-denominated intercompany transactions. All such contracts were denominated in Japanese yen. As of March 31, 2004 and December 31, 2003, $3.7 million of net unrealized losses and $3.9 million of net unrealized losses, net of related taxes,

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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Finanical Statements


  respectively, were recorded in accumulated other comprehensive loss. The contracts held at March 31, 2004 have maturities through February 2005 and accordingly, all unrealized gains and losses on foreign currency cash flow hedges included in accumulated other comprehensive loss will be recognized in current earnings over the next 12 months. The Company recognized pre-tax net losses on foreign currency cash flow hedges of $2.7 million and $1.3 million for the three-month periods ended March 31, 2004 and 2003, respectively, which were recorded primarily as an offset to revenue in Japan.

6. REPURCHASE OF COMMON STOCK

  During the three-month period ended March 31, 2004, the Company did not repurchase any shares of its Class A common stock under its open market repurchase plan. During the three-month period ended March 31, 2003, the Company repurchased approximately 559,000 shares of Class A common stock under the plan for approximately $5.9 million.

7. COMPREHENSIVE INCOME

  The components of comprehensive income, net of related tax, for the three-month periods ended March 31, 2004 and 2003, were as follows (in thousands):

Three
Months Ended
March 31, 2004
  Three
Months Ended
March 31, 2003
 
Net income   $              14,480   $              12,783  
   
Other comprehensive income (loss), net of tax: 
     Foreign currency translation adjustments  (816 ) (955 )
     Net unrealized gain (loss) on foreign 
         currency cash flow hedges  (1,529 ) 200  
     Net loss reclassified into current earnings  1,702   756  
   
Comprehensive income  $              13,837   $              12,784  
8. SEGMENT INFORMATION

  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 except for its operations in Mainland China. In Mainland China the Company utilizes an employed sales force to sell its products through fixed retail locations. The Company’s largest expense (selling expenses) is the commissions and Mainland China sales employee expenses paid on product sales. The Company manages its business primarily by managing its global sales force. The Company does not use profitability reports on a regional or divisional basis for making business decisions. However, the Company does recognize revenue in five geographic regions: North Asia, Greater China, North America, South Asia/Pacific and Other Markets. Revenue generated in each of these regions is set forth below (in thousands):

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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Finanical Statements


Revenue:  Three
Months Ended
March 31, 2004
  Three
Months Ended
March 31, 2003
 
North Asia   $                150,055   $                134,095  
Greater China  47,575   26,712  
North America  37,562   32,802  
South Asia/Pacific  19,677   17,902  
Other Markets  9,119   8,121  
     Total  $                263,988   $                219,632  

  Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. These reclassifications match the hedging gains and losses associated with the Japanese yen to the North Asia region, which were previously classified under the North America region.

  Additional information as to the Company’s operations in the most significant geographical areas is set forth below (in thousands):

  Revenue
Revenue from the Company’s operations in Japan totaled $134,304 and $120,731 for the three-month periods ended March 31, 2004 and 2003, respectively. Revenue from the Company’s operations in the United States totaled $35,126 and $30,366 for the three-month periods ended March 31, 2004 and 2003, respectively.

  Long-lived assets
Long-lived assets in Japan were $18,219 and $18,553 as of March 31, 2004 and December 31, 2003, respectively. Long-lived assets in the United States were $281,239 and $286,659 as of March 31, 2004 and December 31, 2003, respectively.

9. NEW PRONOUNCEMENTS

  During the first quarter of 2004, the Company adopted FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. This accounting standard became effective during the first quarter of 2004. The adoption of this accounting standard did not have a significant effect on the Company’s financial statements.

10. DEFERRED TAX ASSETS AND LIABILITIES

  The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This statement establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting of income taxes. The Company pays income taxes in many foreign jurisdictions based on the profits realized in those jurisdictions, which can be significantly impacted by terms of intercompany transactions between the Company and its foreign affiliates. Deferred tax assets and liabilities are created in this process. As of March 31, 2004, the Company has net deferred tax assets of $64.1 million. The Company has netted these deferred tax assets and

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NU SKIN ENTERPRISES, INC.
Notes to Consolidated Finanical Statements


  deferred tax liabilities by jurisdiction as of March 31, 2004 and reclassified prior period balances to conform to the March 31, 2004 presentation.

11. INTANGIBLE ASSETS

  The Company is required to make judgments regarding the useful life of its intangible assets. With the implementation of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), the Company determined certain intangible assets to have indefinite lives based upon its analysis of the requirements of SFAS 141, Business Combinations, and SFAS 142 as well as an independent third party evaluation of such lives, which was conducted in 2001. These intangible assets include the Company’s trademarks and trade names, its distributor network and its marketing rights to operate the Company’s business in various foreign markets. In connection with a registration statement the Company filed in October 2003, the Staff of the Securities and Exchange Commission has commented on and sought additional support for the indefinite life designation of these assets. This review is ongoing and if it is determined that any of these assets has a finite life, the Company would amortize the value of that asset over the remainder of such finite life, which annual amortization expense the Company does not believe would be material to its operating results. The amortization expense would be a non-cash expense that would not impact the Company’s cash flow from operations.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following Management’s Discussion and Analysis should be read in conjunction with Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission (“SEC”) on March 15, 2004, and our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report.

2004 compared to 2003

        Overview

                 Revenue for the three-month period ended March 31, 2004 increased 20.2% to $264.0 million from $219.6 million for the same period in 2003. Excluding the impact of changes in foreign currency exchange rates, we would have experienced a revenue increase of 14.2% for the three-month period ended March 31, 2004 compared to the same period in 2003. This resulted from strong momentum in Mainland China, growth in the U.S. nutrition business and continued stability in Japan in spite of the challenges associated with the Bovine Spongiform Encephalopathy (“BSE”) issue (commonly referred to as “mad cow disease”) as discussed below. These factors were partially offset by the sale of our professional employer organization (“PEO”) in the United States in August 2003 and our transition away from certain Big Planet offerings, both of which occurred as part of our continued efforts to eliminate low margin products and services. Although these actions negatively impacted first quarter 2004 to first quarter 2003 revenue comparisons by $5.0 million, they positively impacted gross and operating margins during the quarter. Earnings per share for the three-month period ended March 31, 2004 increased 25.0% to $0.20 from $0.16 for the same period in 2003. In addition to the factors noted above impacting revenue and gross and operating margins, earnings per share were positively impacted by the repurchase of 10.8 million shares of our Class A common stock, which occurred in October 2003.

        Revenue

                 North Asia. The following table sets forth revenue for the three-month periods ended March 31, 2004 and 2003 for the North Asia region and its principal markets (in millions):

2004
  2003
  Change
 
Japan   $          134.3   $          120.7   11%  
South Korea  15.8   13.4   18%  
North Asia total  $          150.1   $          134.1   12%  

                 Growth in revenue during the quarter resulted primarily from favorable currency exchange rates and strong growth in South Korea. Excluding the impact of changes in foreign currency exchange rates, revenue in North Asia increased 3% in the first quarter of 2004 compared to the same period in 2003. In local currency, revenue in Japan increased 1% in the first quarter of 2004 compared to the same period in 2003. In local currency, revenue in South Korea increased 15% in the first quarter of 2004 compared to the same period in 2003. The growth in revenue in South Korea was due to the strength in active distributors, which primarily resulted from a management change in that market in September 2003.

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                 Greater China. The following table sets forth revenue for the three-month periods ended March 31, 2004 and 2003 for the Greater China region and its principal markets (in millions):

2004
  2003
  Change
 
Mainland China   $            22.8   $              3.6   533%  
Taiwan  17.1   17.6   (3% )
Hong Kong  7.7   5.5   40%  
Greater China total  $            47.6   $            26.7   78%  

                 Revenue in Greater China increased primarily as a result of the continued sequential growth following the early 2003 expansion of operations in Mainland China. Foreign currency fluctuations from 2003 to 2004 did not have a notable impact on this region. On a sequential basis, revenue in Mainland China increased 27% from the fourth quarter of 2003 to the first quarter of 2004. This growth is attributed to an increased number of preferred customers and employed sales representatives in Mainland China as well as the opening of new cities and stores in December 2003 and January 2004. As our business expands in Mainland China, we continue to experience government scrutiny due to our international reputation as a direct selling company. Although we conduct retail operations and not direct selling operations in Mainland China, we expect the government scrutiny to continue until the new direct selling laws and regulations are published, which is anticipated to occur late in 2004. For a more detailed discussion of the risks and challenges we face in Mainland China, please refer to “Note Regarding Forward-Looking Statements”. We currently operate in a total of 23 cities in 8 provinces in Mainland China.

                 Hong Kong reached record sales during the first quarter of 2004 with revenue up approximately 40% over the same prior year period. This increase in revenue in Hong Kong resulted from the influence of the strong momentum in Mainland China as well as our success in growing monthly product subscription orders in this market.

                 North America. The following table sets forth revenue for the three-month periods ended March 31, 2004 and 2003 for the North America region and its principal markets (in millions):

2004
  2003
  Change
 
United States   $            35.1   $            30.4   15%  
Canada  2.5   2.4   4%