UNITED STATES
SECURITIES A2ND EXCHANGE COMMISSION
WASHINGTON, DC 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 MARCH 31, 2005 |
| 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 April 29, 2005, 69,917,751 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.
| 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. Unregistered Sales of Equity Securities and Use of Proceeds | 20 | |
| 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 | 22 | |
| Signature | 23 |
Nu
Skin, Pharmanex and Big Planet are trademarks of
Nu Skin Enterprises, Inc. or its
subsidiaries.
-i-
NU SKIN ENTERPRISES, INC.
Consolidated Balance
Sheets
(in thousands, except share amounts)
| March 31, 2005 | December 31, 2004 | ||||
|---|---|---|---|---|---|
| ASSETS | (Unaudited) | ||||
| Current assets: | |||||
| Cash and cash equivalents | $ 150,802 | $ 109,865 | |||
| Current investments | 5,775 | 10,230 | |||
| Accounts receivable | 17,390 | 16,057 | |||
| Inventories, net | 91,260 | 87,474 | |||
| Prepaid expenses and other | 40,377 | 44,723 | |||
| 305,604 | 268,349 | ||||
| Property and equipment, net | 80,320 | 76,511 | |||
| Goodwill | 112,446 | 112,446 | |||
| Other intangible assets, net | 82,500 | 79,005 | |||
| Other assets | 78,626 | 73,426 | |||
| Total assets | $ 659,496 | $ 609,737 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
| Current liabilities: | |||||
| Accounts payable | $ 20,891 | $ 25,182 | |||
| Accrued expenses | 117,060 | 107,226 | |||
| Current portion of long-term debt | 17,935 | 18,540 | |||
| 155,886 | 150,948 | ||||
| Long-term debt | 158,780 | 132,701 | |||
| Other liabilities | 29,219 | 29,855 | |||
| Total liabilities | 343,885 | 313,504 | |||
| Commitments and contingencies (Note 11) | |||||
| Stockholders' equity: | |||||
| Class A common stock - 500 million shares authorized, $.001 | |||||
| par value, 90.6 million shares issued | 91 | 91 | |||
| Additional paid-in capital | 167,244 | 165,177 | |||
| Treasury stock, at cost 20.8 million and 20.9 million shares | (275,597 | ) | (273,721 | ) | |
| Accumulated other comprehensive loss | (64,039 | ) | (71,606 | ) | |
| Retained earnings | 489,338 | 477,912 | |||
| Deferred compensation | (1,426 | ) | (1,620 | ) | |
| 315,611 | 296,233 | ||||
| Total liabilities and stockholders' equity | $ 659,496 | $ 609,737 | |||
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 share amounts)
| Three Months Ended March 31, | |||||
|---|---|---|---|---|---|
| 2005 | 2004 | ||||
| Revenue | $ 289,351 | $ 263,988 | |||
| Cost of sales | 49,664 | 43,923 | |||
| Gross profit | 239,687 | 220,065 | |||
| Operating expenses: | |||||
| Selling expenses | 123,743 | 112,582 | |||
| General and administrative expenses | 87,183 | 83,634 | |||
| Total operating expenses | 210,926 | 196,216 | |||
| Operating income | 28,761 | 23,849 | |||
| Other income (expense), net | (655 | ) | (865 | ) | |
| Income before provision for income taxes | 28,106 | 22,984 | |||
| Provision for income taxes | 10,399 | 8,504 | |||
| Net income | $ 17,707 | $ 14,480 | |||
| Net income per share (Note 3): | |||||
| Basic | $ 0.25 | $ 0.20 | |||
| Diluted | $ 0.25 | $ 0.20 | |||
| Weighted-average common shares outstanding: | |||||
| Basic | 69,747 | 70,691 | |||
| Diluted | 71,353 | 72,467 | |||
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)
| Three Months Ended March 31, |
|||||
|---|---|---|---|---|---|
| 2005 | 2004 | ||||
| Cash flows from operating activities: | |||||
| Net income | $ 17,707 | $ 14,480 | |||
| Adjustments to reconcile net income to net cash provided by | |||||
| operating activities: | |||||
| Depreciation and amortization | 7,338 | 6,083 | |||
| Amortization of deferred compensation | 194 | 194 | |||
| Changes in operating assets and liabilities: | |||||
| Accounts receivable | (1,333 | ) | (3,069 | ) | |
| Inventories, net | (3,786 | ) | (10,524 | ) | |
| Prepaid expenses and other | 4,761 | 5,824 | |||
| Other assets | (2,681 | ) | 868 | ||
| Accounts payable | (4,291 | ) | (1,140 | ) | |
| Accrued expenses | 10,783 | 4,334 | |||
| Other liabilities | 385 | 363 | |||
| Net cash provided by operating activities | 29,077 | 17,413 | |||
| Cash flows from investing activities: | |||||
| Purchase of property and equipment | (8,845 | ) | (5,930 | ) | |
| Proceeds on investment sales | 48,705 | 4,570 | |||
| Purchases of investments | (44,250 | ) | (17,270 | ) | |
| Purchase of long-term assets | (1,746 | ) | — | ||
| Net cash used in investing activities | (6,136 | ) | (18,630 | ) | |
| Cash flows from financing activities: | |||||
| Exercise of distributor and employee stock options | 1,709 | 5,034 | |||
| Proceeds from long-term debt | 30,000 | — | |||
| Payments of cash dividends | (6,281 | ) | (5,754 | ) | |
| Repurchase of shares of common stock | (5,045 | ) | — | ||
| Net cash provided by (used in) financing activities | 20,383 | (720 | ) | ||
| Effect of exchange rate changes on cash | (2,387 | ) | 2,032 | ||
| Net increase in cash and cash equivalents | 40,937 | 95 | |||
| Cash and cash equivalents, beginning of period | 109,865 | 122,568 | |||
| Cash and cash equivalents, end of period | $ 150,802 | $ 122,663 | |||
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 that are sold worldwide under the Nu Skin and Pharmanex brands. The Company also markets technology-related 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, Brunei, Malaysia, New Zealand, the Philippines, Singapore and Thailand; and Other Markets, which consists of Brazil, Europe, Guatemala, Israel 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, 2005, and for the three-month periods ended March 31, 2005 and 2004. 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, 2004.
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. SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amended SFAS No. 123, requires more prominent and frequent disclosures about the effects of stock-based compensation, which have been provided herein.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment, which requires the expensing of employee options as of the beginning of the first fiscal year that begins after June 15, 2005. Consequently, the Company will begin expensing employee options during its first quarter of 2006 and is currently evaluating the effect of this accounting standard on its financial statements. Until that time, the Company will continue to account for its stock-based compensation granted to employees according to the provisions of APB Opinion No. 25. Had compensation cost for the Company’s stock options granted to employees 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 (U.S. dollars in thousands, except per share amounts):
-4-
NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
| Three Months Ended March 31, |
|||||
|---|---|---|---|---|---|
| 2005 | 2004 | ||||
| Net income, as reported | $ 17,707 | $ 14,480 | |||
| Deduct: Total compensation expense determined | |||||
| under fair value based method for all | |||||
| awards, net of related tax effects | (1,728 | ) | (1,551 | ) | |
| Pro forma net income | $ 15,979 | $ 12,929 | |||
| Earnings per share: | |||||
| Basic - as reported | $ 0.25 | $ 0.20 | |||
| Basic - pro forma | $ 0.23 | $ 0.18 | |||
| Diluted - as reported | $ 0.25 | $ 0.20 | |||
| Diluted - pro forma | $ 0.22 | $ 0.18 | |||
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, 2005 and 2004, other stock options totaling 0.7 million and 0.8 million, respectively, were excluded from the calculation of diluted earnings per share because they were anti-dilutive. Earnings per share in 2005 were positively impacted by the repurchase of 3.1 million shares of the Company’s Class A common stock in July 2004.
In February 2005, the board of directors declared a quarterly cash dividend of $0.09 per share for the Company’s Class A common stock. This quarterly cash dividend of approximately $6.3 million was paid on March 23, 2005 to stockholders of record on March 4, 2005.
At March 31, 2005 and December 31, 2004, the Company held forward contracts designated as foreign currency cash flow hedges with notional amounts totaling approximately $54.1 million and $82.0 million, respectively, to hedge foreign-currency-denominated intercompany transactions. All such contracts were denominated in Japanese yen. As of March 31, 2005 and December 31, 2004, $0.4 million and $3.2 million of net unrealized losses, net of related taxes, respectively, were recorded in accumulated other comprehensive loss. The contracts held at March 31, 2005 have maturities through March 2006 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 losses on foreign currency cash flow hedges of $0.3 million and $2.7 million for the three-month periods ended March 31, 2005 and 2004, respectively, which were recorded primarily as an offset to revenue in Japan.
During the three-month period ended March 31, 2005, the Company repurchased approximately 0.2 million shares of its Class A common stock under its open market repurchase plan for approximately $5.0
-5-
NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
million. During the three-month period ended March 31, 2004, the Company did not repurchase any shares of Class A common stock under the plan.
The components of comprehensive income, net of related tax, for the three-month periods ended March 31, 2005 and 2004, were as follows (in thousands):
| Three Months Ended March 31, |
|||||
|---|---|---|---|---|---|
| 2005 | 2004 | ||||
| Net income | $ 17,707 | $ 14,480 | |||
| Other comprehensive income (loss), net of tax: | |||||
| Foreign currency translation adjustment | 4,737 | (816 | ) | ||
| Net unrealized gains (losses) on foreign | |||||
| currency cash flow hedges | 2,680 | (1,529 | ) | ||
| Less: Reclassification adjustment for
realized losses in current earnings | 150 | 1,702 | |||
| Comprehensive income | $ 25,274 | $ 13,837 | |||
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 world-wide 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):
| Three Months Ended March 31, |
|||||
|---|---|---|---|---|---|
| Revenue: | 2005 | 2004 | |||
| North Asia | $ 160,829 | $ 150,055 | |||
| Greater China | 59,127 | 47,575 | |||
| North America | 35,992 | 37,562 | |||
| South Asia/Pacific | 20,635 | 19,677 | |||
| Other Markets | 12,768 | 9,119 | |||
| Total | $ 289,351 | $ 263,988 | |||
-6-
NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
Revenue generated by each of the Company’s three product lines is set forth below (in thousands):
| Three Months Ended March 31, |
|||||
|---|---|---|---|---|---|
| Revenue: | 2005 | 2004 | |||
| Nu Skin | $ 118,346 | $ 132,363 | |||
| Pharmanex | 165,499 | 125,938 | |||
| Big Planet | 5,506 | 5,687 | |||
| Total | $ 289,351 | $ 263,988 | |||
Additional information as to the Company’s operations in the most significant geographical areas is set forth below (in thousands):
| Three Months Ended March 31, | |||||||
|---|---|---|---|---|---|---|---|
| Revenue: | 2005 | 2004 | |||||
| Japan | $ 141,231 | $ 134,304 | |||||
| United States | 33,681 | 35,126 | |||||
| Mainland China | 26,620 | 22,796 | |||||
| Long-lived assets: | March 31, 2005 | December 31, 2004 | |||
|---|---|---|---|---|---|
| Japan | $ 14,140 | $ 9,390 | |||
| United States | 36,522 | 39,548 | |||
| Mainland China | 12,844 | 12,089 | |||
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which requires certain inventory-related costs to be expensed as incurred. This accounting standard is effective January 1, 2006. The Company is currently assessing the effect of this accounting standard on its financial statements.
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, 2005, the Company has net deferred tax assets of $49.2 million. The Company has netted these deferred tax assets and deferred tax liabilities by jurisdiction.
In October 2004, the Yokohama, Japan customs authorities assessed the Company approximately $9.0 million, net of any recovery of consumption taxes, for duties on products imported into Japan from October 2002 through October 2003. The value and methodology the Company used for determining the amount of duties payable for this period is consistent with years prior to 2002 and has been previously
-7-
NU SKIN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
reviewed on several occasions by the audit division of the Japan customs authorities, and reviewed and approved by the Valuation Department of the Yokohama customs authority. Consequently, the Company believes the assessment is improper, and it has filed letters of protest with Yokohama customs. Prior to filing the letters of protest, the Company was required to remit the amount that was assessed. This amount has been recorded in “Other Assets” in the Company’s Consolidated Balance Sheets. As expected, Yokohama customs did not accept the letters of protest, and to follow proper administrative procedures the Company has filed an appeal with the Japan Ministry of Finance. To the extent necessary, the Company plans to continue to file protests and appeals within the appropriate governmental channels concerning this issue. The Company may also choose to use the judicial court system in Japan if necessary to bring this issue to a resolution.
In addition, the Audit Division of Yokohama customs has recently completed an audit of the period from November 2003 through October 2004. Although the Company has not yet been informed of the results of this audit, it may be assessed for additional duties related to this period, which the Company anticipates would be a similar amount to the prior assessment. The Company would vigorously contest any such assessment.
In March 2002, the Company acquired the exclusive rights to a new laser technology related to measuring the level of certain antioxidants. The acquisition consisted of cash payments of $4.8 million (including acquisition costs) and the issuance of 106,667 shares of the Company’s Class A common stock valued at $0.9 million. In addition, the acquisition included contingent payments up to $8.5 million of cash and up to 1.2 million shares of the Company’s Class A common stock if certain development and revenue targets are met. In 2004, some of these specific development and revenue targets were met resulting in contingent payments of approximately $5.1 million of cash and 525,000 shares of the Company’s Class A common stock valued at $13.0 million. During the quarter ended March 31, 2005, more of these specific development and revenue targets were met resulting in additional contingent payments of approximately $1.8 million of cash, all of which was paid subsequent to quarter end, and 150,000 shares of the Company’s Class A common stock valued at $3.4 million, all of which was issued subsequent to quarter end. These amounts have been added to the carrying value of other finite life intangible assets.
On February 7, 2005, the Company issued a series of Japanese yen denominated senior promissory notes (the “Notes”) to affiliates of Prudential Investment Management, Inc. (“Prudential”). The Notes were issued pursuant to its $125.0 million Private Shelf agreement entered into between the Company and Prudential on August 26, 2003 (the “Shelf Agreement”).
The aggregate principal amount of the Notes is 3.1 billion Japanese yen, or approximately $30.0 million as of February 7, 2005, bearing a 1.7% interest rate per annum, with interest payable semi-annually beginning on April 30, 2005. The final maturity date of the Notes is April 30, 2014 and principal payments are required annually beginning on April 30, 2008 in equal installments of 445.7 million Japanese yen. The Notes are also governed by the terms of the Shelf Agreement and amendments thereto, w