Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (02-03-09 08:24 AM)

The Daily Magic Formula Stock for 02/03/2009 is Nu Skin Enterprises Inc. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is 75-100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Overview

Nu Skin Enterprises is a global direct selling company with operations in over 45 markets throughout Asia, the Americas and Europe. We market premium quality personal care products under the Nu Skin brand, science-based nutritional supplements under the Pharmanex brand and technology products and services under the Big Planet brand. We conduct business using a direct selling model in all of our markets with the exception of Mainland China (hereinafter “China”). In China, because of regulatory restrictions, we implemented a retail business model with employed sales representatives. However, we are currently integrating direct selling into our business model in this market pursuant to recently enacted direct selling regulations.

In 2007, we posted revenue of $1.16 billion. As of December 31, 2007, we had a global network of approximately 755,000 active independent distributors, sales representatives, and preferred customers, approximately 30,000 of whom were executive level distributors (including sales representatives in China). Our executive level distributors play an important leadership role in our distribution network and are critical to the growth and profitability of our business.

Approximately 86% of our 2007 revenue came from markets outside the United States. Japan accounted for approximately 38% of our 2007 total revenue and is our largest revenue market. Due to the size of our foreign operations, our results are often impacted positively or negatively by foreign currency fluctuations, particularly fluctuations in the Japanese yen. In addition, our results are impacted by global economic, political and general business conditions.

We develop and market branded consumer products that we believe are well suited for direct selling. Our distributors sell our products by educating consumers about the benefits and distinguishing characteristics of our products and by offering personalized customer service. Leveraging our research and development efforts, we continually develop and introduce new products that enhance our product portfolio. We attempt to attract and motivate high-caliber, independent distributors because of our focus on product innovation, our generous global compensation plan and our distributor support programs.

Our business is subject to various laws and regulations globally, in particular with respect to network marketing activities, cosmetics, and nutritional supplements. This creates certain risks for our business, including improper activities by our distributors or our inability to obtain or maintain necessary product registrations.
Strategies

As we work to grow our business, we are focused on the following three key strategies:
• introducing unique tools;

• developing compelling and innovative products under three distinct brands; and

• offering motivating and rewarding distributor incentives.

Unique Tools. We remain committed to providing unique tools and initiatives that help demonstrate our difference, motivate distributors, and aid in recruiting and product sales. Providing evidence that our products are efficacious using state-of-the-art tools is a distinct business advantage. During 2007, we introduced a new branding strategy supporting this concept titled “the difference. demonstrated.” Throughout the year, we benefited from three distributor tools that help demonstrate our difference: the Galvanic Spa System II, a handheld unit that uses galvanic current to effectively pull impurities from the skin while driving beneficial ingredients into the skin helping to treat the visible signs of aging; the Pharmanex BioPhotonic Scanner (the “Scanner”), a portable unit based on patented technologies that allows distributors to non-invasively measure the impact of our nutritional products, particularly our LifePak line of products; and the Nu Skin ProDerm Skin Analyzer (the “ ProDerm Skin Analyzer ”), a handheld skin imaging and analysis tool that enables distributors to demonstrate the effectiveness of our skin care products by providing a visual assessment of various skin attributes together with a recommended regimen of Nu Skin products.

Innovative Products . Compelling and innovative products are vital to our success as they help attract distributors and customers. Our distributors use the innovative features of our products to build successful sales organizations and attract new customers. Our product philosophy is largely based on anti-aging and we believe we have a competitive advantage in this area through our product offerings. We believe we are one of only a few direct selling companies that has successfully built product equity in both skin care and nutrition, both key anti-aging categories. Key anti-aging products include:
• LifePak, a family of anti-aging nutritional supplement products aimed at providing optimal levels of antioxidants, phytonutrients, vitamins, minerals and other vital ingredients that help promote general wellness;

• g3, a nutrient-rich juice blend containing a highly concentrated mix of carotenoid antioxidants and micronutrients with a natural delivery system called lipocarotenes ;

• Nu Skin 180° Anti-aging Skin Therapy System , designed to combat the visible signs of aging, specifically targeting improving the appearance of facial lines and wrinkles;

• Tru Face Essence and Tru Face Essence Ultra , anti-aging products featuring the ingredient Ethocyn which helps to minimize the natural loss of skin elastin and improve skin tone ;

• MyVictory! and The Right Approach (TRA) , weight management systems that were each developed for a different lifestyle and diet and which focus on controlling cravings while boosting metabolism.

Distributor Incentives . We are committed to providing generous compensation and incentives to our distributors in order to motivate them and reward them for distributing our products. We believe our global sales compensation plan is one of our competitive advantages and we often refine our plan and add enhancements to help our distributors grow their businesses. For example, during the year ended December 31, 2007, we launched a gross retail product (GRP) program targeted at providing additional commissions and early income for new distributors who are interested in building their sales organizations. In addition, we have continued to expand and promote product subscription and loyalty programs in many of our markets that provide incentives for customers who commit to purchase a set amount of products on a recurring basis. We believe that these programs, along with a concerted focus on global compensation plan alignment and an increased level of distributor recognition, goal setting and accountability, will help motivate our distributors to drive revenue growth.
Our Product Categories

We have three product categories, each operating under its own brand. We market our premium-quality personal care products under the Nu Skin brand, science-based nutritional supplements under the Pharmanex brand, and technology-based products and services under the Big Planet and Photomax brands.

Presented below are the U.S. dollar amounts and associated revenue percentages from the sale of Nu Skin, Pharmanex, and Big Planet products and services for the years ended December 31, 2005, 2006, and 2007. This table should be read in conjunction with the information presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” which discusses the costs associated with generating the aggregate revenue presented.

(1) In 2007, 86% of our sales were transacted in foreign currencies that were then converted to U.S. dollars for financial reporting purposes at weighted-average exchange rates. Foreign currency fluctuations positively impacted reported revenue by approximately 1% in 2007 compared to 2006, and negatively impacted reported revenue by approximately 1% in 2006 compared to 2005.

Nu Skin . Nu Skin is our original product line and offers premium-quality personal care products in the areas of core systems, targeted treatments, total care, cosmetics and our specialty botanical-based Epoch line. Our strategy is to leverage our network marketing distribution model to establish Nu Skin as an innovative leader in the personal care market. We are committed to continuously improving and evolving our product formulations to develop and incorporate innovative and proven ingredients.

In addition to marketing premium-quality personal care products, we are committed to developing tools to help distributors market our products more effectively. Under the Nu Skin brand, we have two unique tools. The first is the Galvanic Spa System II , which was first introduced in 2002, and has experienced strong growth during the last 18 months. The other tool is the second generation of the ProDerm Skin Analyzer , which was introduced in the third quarter of 2007 at the company’s global convention. This portable proprietary skin analysis tool allows users to receive a personalized analysis on four different skin attributes (wrinkles, pore size, skin texture, and discoloration), and enables distributors to demonstrate the effectiveness of our skin care products by providing close up skin images and a recommended regimen of Nu Skin products. This unit is currently available only in the United States and Europe.

Pharmanex . We market a variety of nutritional products comprised of comprehensive micronutrient supplements, targeted nutritional supplements, weight management supplements and certain specialty solution products under the Pharmanex brand. LifePak, our flagship line of micronutrient and phytonutrient supplements, accounted for 22% of our total revenue and 39% of Pharmanex revenue in 2007.

Direct selling has proven to be an extremely effective method of marketing our high-quality nutritional supplements because our distributors can personally educate consumers on the quality and benefits of our products, differentiating them from our competitors’ offerings. Our strategy for expanding the nutritional supplement business is to introduce innovative, substantiated products based on extensive research and development and quality manufacturing. Our product development efforts focus in the areas of anti-aging, weight management, and general nutrition.

We continue to market our the Scanner , a tool developed to measure a persons carotenoid antioxidants using a light source shown into the palm of the hand, to demonstrate our difference. This is used globally in our business, and is a powerful tool utilized by our distributors. Several improvements and enhancements have been made to the unit over the past three years. The latest was introduced at our global distributor convention held in September. In 2006, we acquired the exclusive rights to use the Scanner technology in medical settings, and as a result, we own the rights to use the Scanner within all environments worldwide where allowed by legal and regulatory requirements.

Big Planet and Photomax . We offer technology products and services centered around two product categories under the Big Planet and Photomax brands: business tools and digital imaging. Our strategy is to provide simple and innovative technological products.

In 2005, we introduced a web-based digital photo service called Photomax , available on the web at Photomax.com , which makes it easy for consumers to view, organize and share digital pictures online. Since 2005, we have added additional products and services aimed at the preservation of memories.

Our Big Planet business tools, products and services are designed to help distributors increase their productivity by leveraging technology in the management of their direct selling activities. By providing an assortment of business tools, distributors can better manage and communicate with their sales force and potential customers.

Sourcing and Production

Nu Skin . In order to maintain high product quality, we acquire our ingredients and contract production of our proprietary products from suppliers and manufacturers that we believe are reliable, reputable and deliver high quality materials and service. We acquire ingredients and products from two primary suppliers that currently each manufacture products that represent approximately 25% of our Nu Skin personal care revenue. We maintain a good relationship with our suppliers and do not anticipate that either party will terminate the relationship in the near term. We also have ongoing relationships with secondary and tertiary suppliers. In the event we become unable to source any products or ingredients from our major suppliers, we believe that we would be able to produce or replace those products or substitute ingredients from our secondary and tertiary suppliers without great difficulty or significant increases to our cost of goods sold. Please refer to “Item 1A. — Risk Factors” for a discussion of risks and uncertainties associated with our supplier relationships and with the sourcing of raw materials and ingredients.

We also established a production facility in Shanghai, where we currently manufacture our personal care products sold through our retail stores in China, as well as a small portion of product exported to select other markets. We believe that if the need arose, this plant could be expanded—or other facilities could be built in China—to produce larger amounts of inventory for export or as a back up to our existing supply chain.

Pharmanex . Substantially all of our Pharmanex nutritional supplements and ingredients, including LifePak , are produced or provided by third-party suppliers and manufacturers. We rely on two partners for the majority of our Pharmanex products, one of which supplies products that represent approximately 35% of our nutritional supplement revenue while the other supplier manufactures products that represent approximately 18% of our nutritional supplement revenue. In the event we become unable to source any products or ingredients from these suppliers or from other current vendors, we believe that we would be able to produce or replace those products or substitute ingredients without great difficulty or significant increases to our cost of goods sold. Please refer to Item 1A. – “Risk Factors” for a discussion of certain risks and uncertainties associated with our supplier relationships, as well as with the sourcing of raw materials and ingredients.

We also maintain a facility located in Zhejiang Province, China, where we produce herbal extracts for Tegreen 97, ReishiMax GLp and other products sold globally. In 2005, we completed the build-out of a new manufacturing facility in Zhejiang Province where we produce some of our Pharmanex nutritional supplements for sale through our retail stores in China as well as a small portion of product exported to other markets. In addition, we operate a plant in Shanghai where we manufacture and repair our Scanners.

Big Planet . Third parties, pursuant to contractual arrangements, provide the majority of our Big Planet and Photomax products and services. By acting as a private-labeled agent for other vendors, we are able to avoid the large capital investment that would be required to build the infrastructure necessary to fulfill Big Planet’s product offerings. However, our profit margins and our ability to deliver quality services at competitive prices depend upon our ability to negotiate and maintain favorable terms with third-party providers.
Research and Development

We continually invest in our research and development capabilities. Our research and development expenditures were approximately $8 million in 2005, $9 million in 2006 and $10 million in 2007. Because of our commitment to product innovation, we will continue to commit resources to research and development in the future.

Our primary research and testing laboratory, adjacent to our office complex in Provo, Utah, houses both Pharmanex and Nu Skin research facilities and professional and technical personnel. We also maintain research facilities in China. Much of our Pharmanex research to date is conducted in China, where we benefit from a well-educated, low-cost, scientific labor pool that enables us to conduct research and clinical trials at a much lower cost than would be possible in the United States.

We also have collaborative relationships with numerous independent scientists, including scientific advisory boards comprised of recognized authorities in related disciplines for each of our nutritional and personal care product categories. We also enter into collaborative arrangements with prominent universities and research institutions in the United States, Europe and Asia, whose staffs include scientists with expertise in natural product chemistry, biochemistry, dermatology, pharmacology and clinical studies. Some of the university research centers with which we have collaborated include Purdue University, Stanford University, Vanderbilt University, and Tufts University.

In addition, we evaluate a significant number of product ideas for our Nu Skin and Pharmanex categories presented by outside sources. We utilize strategic licensing and other relationships with vendors for access to directed research and development work for innovative and proprietary offerings.
Geographic Sales Regions

We currently sell and distribute our products in over 45 markets, employing a direct selling model in each of our markets except China. We have segregated our markets into five geographic regions: North Asia, Greater China, Americas, South Asia/Pacific and Europe. The following table sets forth the revenue for each of the geographic regions for the years ended December 31, 2005, 2006 and 2007:

Japan is our largest market and accounted for approximately 38% of total revenue in 2007. We market most of our Nu Skin and Pharmanex products in Japan, along with a limited number of Big Planet offerings. In addition, all three product categories offer a limited number of locally developed products sold exclusively in our Japanese market. In 2007, we introduced a skin care product specifically for Japan called Duo as well as restaged the Galvanic Spa System II in the fourth quarter. In 2008, we have plans to launch LifePak Nano , Tru Face Essence Ultra and incorporate innovative anti-aging technologies into existing products.

In South Korea, we offer most of our Nu Skin and Pharmanex products, along with a limited number of Big Planet services. Product introductions for 2007 included the launch of Tri-Phasic White , a skin whitening system, as well as a focus on child-specific nutritional products. During the year, we also moved operations to a new, state-of-the-art facility in Seoul. In 2008, we plan to introduce Estra , Tru Face Essence Ultra, and CordyMax .

Greater China. The following table provides information on each of the markets in the Greater China region, including the year opened, 2007 revenue, and the percentage of our total 2007 revenue for each market:

CEO BACKGROUND

Directors are elected at each annual meeting of stockholders and hold office until their successors are duly elected and qualified at the next annual meeting of stockholders. Our Bylaws provide that the Board of Directors will consist of a minimum of five and a maximum of eleven directors, with the number being designated by the Board of Directors. The current number of authorized directors is eleven.

Each of our current directors was previously elected to his or her present term of office by our stockholders. Each of the nominees is currently a director of our company, except for Nevin Andersen, Thomas Pisano and David Ussery. Mr. Anderson was recommended by Dan Campbell, our Lead Independent Director, and Mr. Pisano was recommended by one of our former directors. Mr. Ussery was recommended by Gary Sumihiro, the President of our Japan operations. Mssrs. Andersen, Pisano and Ussery have agreed to serve if elected.

Christine Day will not stand for reelection. Therefore, our Board of Directors will consist of eleven members after the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH
OF THE ELEVEN NOMINEES TO OUR BOARD OF DIRECTORS

Set forth below are the name, age, and business experience of each of the eleven nominees for election as our directors, listed in alphabetical order:

Nevin N. Andersen , 67, served in various positions, including Senior Vice President and Chief Financial Officer, Vice President and Corporate Controller, and Director of Internal Audit of Shaklee Corporation, a direct selling company, from June 1979 to February 2003, when he retired. He was asked to return to Shaklee Corporation for a period of time to serve as the Interim Chief Financial Officer and to help in the transition with a new Chief Financial Officer, which role he fulfilled from March 2005 to February 2008. Prior to initially working at Shaklee Corporation in 1979, he worked for Price Waterhouse & Co., and served as an officer in the U.S. Army Finance Corps. He received M.Acc and B.S. degrees from Brigham Young University.

Daniel W. Campbell , 53, has served as a director of our company since March 1997 and currently serves as our Lead Independent Director. Mr. Campbell has been a Managing General Partner of EsNet, Ltd., a privately held investment company, since 1994. From 1992 to 1994, Mr. Campbell was the Senior Vice President and Chief Financial Officer of WordPerfect Corporation, a software company, and prior to that was a partner of Price Waterhouse LLP. He currently serves as a director of The SCO Group, Inc., a provider of software solutions for businesses. He received a B.S. degree from Brigham Young University.

Jake Garn , 75, has served as a director of our company since March 1997. Senator Garn has been a self-employed consultant since June 2004. He served as a Managing Director of Summit Ventures, LLC, a lobbying firm, from 2000 to May 2004, when he retired. He currently serves on the boards of directors of Franklin Covey Co., a provider of time management seminars and products, Headwaters, Inc., a provider of products, technologies and services to the energy, construction and home improvement industries, and United Space Alliance, a space operations company. He also serves as Chairman of Primary Children’s Medical Center Foundation and is involved in various other private/public sector endeavors. From 1974 to 1993, Senator Garn was a member of the United States Senate and served on numerous Senate Committees. He received a B.S. degree from the University of Utah.

M. Truman Hunt , 49, has served as our President since January 2003 and our Chief Executive Officer since May 2003. He has also served as a director of our company since May 2003. Mr. Hunt joined Nu Skin International, Inc. (“NSI”) (which we acquired in 1998) in 1994 and has served in various positions with NSI and our company, including Vice President and General Counsel from May 1998 to January 2003 and Executive Vice President from January 2001 until January 2003. Prior to 1994, Mr. Hunt served as President and Chief Executive Officer of Better Living Products, Inc., an NSI affiliate involved in the manufacture and distribution of houseware products sold through traditional retail channels and he was a securities and business attorney in private practice. He received a B.S. degree from Brigham Young University and a J.D. degree from the University of Utah.

Andrew D. Lipman , 56, has served as a director of our company since May 1999. Mr. Lipman is a partner and head of the Telecommunications, Media and Technology Group of Bingham McCutchen LLP, an international law firm. Mr. Lipman previously held a similar position from 1988 with Swidler Berlin, LLP, which merged with Bingham McCutchen in 2006. He also currently serves as a member of the boards of directors of Sutron Corporation, a provider of hydrological and meteorological monitoring products, and The Management Network Group, Inc., a telecommunications related consulting firm. He received a B.A. degree from the University of Rochester and a J.D. degree from Stanford Law School.

Steven J. Lund , 55, has served as a director and Vice Chairman of our company since September of 2006. Prior to this, he was on a three year leave of absence serving on a church assignment in Georgia. Mr. Lund served as President, Chief Executive Officer, and a director of our company from its inception in 1996 until his 2003 leave of absence. Mr. Lund was a founding shareholder of Nu Skin International, Inc. (NSI) (which we acquired in 1998) and served as the Executive Vice President of NSI until the Company’s acquisition of NSI. Mr. Lund previously worked as an attorney in private practice. He received a B.A. degree from Brigham Young University and a J.D. degree from Brigham Young University’s J. Reuben Clark Law School.

Patricia Negrón , 41, has served as a director of our company since June 2005. Ms. Negrón is currently an independent business consultant, author and advisor to Goode Partners, LLC, a private equity firm, where she has worked since February 2006. In 1999, Ms. Negrón launched the financial advisory group at Breakaway Solutions, an internet consulting firm, which she managed until 2001. Previously, Ms. Negrón was Vice President, equity research at the investment banking firm Adams, Harkness & Hill. From 1992 until 1996, she managed the corporate governance division, and later expanded into equity research and managing the firm’s econometric model, at United States Trust Company, Boston. She has a B.S. degree from Armstrong Atlantic State University and a Certificate of Special Studies in Administration and Management from Harvard University Extension School.

Thomas R. Pisano , 63, has served as the President, Chief Executive Officer and Director of Overseas Military Sales Corp., a marketer of motor vehicles, since January 2005. From August 1998 to December 2004, he served as the Chief Operating Officer and Director of Overseas Military Sales Corp. From February 1995 to December 1997, he served as Vice President, Head of the International Division, for The Topps Company, Inc., a sports publications and confectionery products company. Prior to that, he served in various positions, including Vice President, Global New Business Development, for Avon Products, Inc., a direct seller of personal care products, from 1969 to 1994. He received a B.S. from the Georgia Institute of Technology and an M.B.A. from Dartmouth College.

Blake M. Roney , 50, has served as Chairman of the Board since our inception in 1996. Mr. Roney was a founder of NSI in 1984 and served as its Chief Executive Officer and President until our acquisition of NSI in March 1998. Since our acquisition of NSI, Mr. Roney has retained his position as Chairman of the Board of our company. He received a B.S. degree from Brigham Young University.

Sandra N. Tillotson , 51, has served as a director of our company since its inception in 1996 and as Senior Vice President since May 1998. Ms. Tillotson was a founding shareholder of NSI and served as a Vice President of NSI from its formation until our acquisition of NSI in 1998. She earned a B.S. degree from Brigham Young University.

David D. Ussery , 72, served as President and Representative Director of Amway Japan Limited & Amway Korea Limited, direct selling companies, from May 2005 to January 2008, when he retired. From April 2002 to April 2005, he served as President and Representative Director of Amway Japan Limited. From 1992 to 2002, he served in various other positions for Amway Korea Limited and Amway Philippines, L.L.C. In addition, he has approximately 30 years of experience working for Avon Products, Inc., a direct seller of personal care products, including as Vice President of Field Operations for the United States and Canada, Area Vice President of Avon Pacific and Chairman of the Board of Avon Japan. He received a B.B.A. degree from Georgia State University.

Set forth below is the name, age, and business experience of the current director who is not standing for reelection:

Christine Day , 46, has served as a director since May 2007. Ms. Day was recently appointed to serve as the Chief Executive Officer of Lululemon Athletica, a marketer of athletic and casual wear, beginning in June. She was serving as the Executive Vice President of Lululemon Athletica, a position she has held since January 2008. Ms. Day previously served as President of the Asia Pacific Group for Starbucks Coffee from January 2004 to February 2007. Prior to her role as president of the Asia Pacific Group, Ms. Day served in a variety of positions with Starbucks since 1986, including senior vice president of Starbucks Coffee International, senior vice president of North American finance and administration, and senior vice president of North American strategic business systems. She currently serves as a member of the board of directors of Select Comfort (NASDAQ: SCSS). She graduated from Central Washington University with a bachelor of arts in Administration and is a graduate of Harvard Business School’s Advanced Management Program. Ms. Day has notified the Company that she will not be standing for re-election at the Company’s annual meeting of shareholders this year.

We are not aware of any family relationships among any of our directors, nominees for directors or executive officers. Our Certificate of Incorporation contains provisions eliminating or limiting the personal liability of directors for violations of a director’s fiduciary duty to the extent permitted by the Delaware General Corporation Law.
CORPORATE GOVERNANCE
Director Independence

The Board of Directors has determined that each of the current directors, listed below, is an “independent director” under the listing standards of the New York Stock Exchange. In addition, the Board of Directors has determined that Nevin Andersen, Thomas Pisano and David Ussery, who are nominees that are not currently on the Board, will each be an “independent director” under the listing standard of the New York Stock Exchange, if elected.

Daniel Campbell
Christine Day
Jake Garn
Andrew Lipman
Patricia NegrĂłn

In addition, the Board of Directors has determined that our former directors, Allen Andersen, Paula Hawkins and Desmond Wong were independent directors. In assessing the independence of the directors, the Board of Directors determines whether or not any director has a material relationship with us (either directly or as a partner, shareholder or officer of an organization that has a relationship with us). The Board of Directors considers all relevant facts and circumstances in making independence determinations, including the existence and scope of any commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships.

With respect to Mr. Lipman’s independence, the Board also considered that he is a partner in the law firm Bingham McCutchen LLP. Bingham McCutchen provides legal services to us primarily in connection with contractual and regulatory issues associated with the telecommunications and enhanced data and voice communications of our Big Planet business. The Board has determined that Mr. Lipman’s relationship with us is not material based on all relevant facts and circumstances, including the following: (i) the fees we paid to Bingham McCutchen during 2007 were approximately $13,000, which is an insignificant amount of Bingham McCutchen’s revenues, and (ii) the fees we paid for these services were not paid directly to Mr. Lipman, rather they were paid to the law firm at which Mr. Lipman is a partner.
Board of Directors Meetings

The Board of Directors held 13 meetings during the fiscal year ended December 31, 2007. Each incumbent director attended at least 75% of the total number of meetings of the Board of Directors and the total number of meetings of all committees of the Board of Directors on which that director served during the period. Although we encourage board members to attend our annual meetings of stockholders, we do not have a formal policy regarding director attendance at annual stockholder meetings. Nine of the then ten directors attended our 2007 annual meeting of stockholders.

The non-management directors meet regularly in executive sessions, as needed, without the management directors or other members of management. Daniel Campbell, the Lead Independent Director, presides at such executive sessions.

We have standing Audit, Compensation and Nominating and Corporate Governance Committees (collectively, the “Committees”). Each member of the Committees is independent within the meaning of the listing standards of the New York Stock Exchange.

The Board of Directors has adopted a written charter for each of the Committees, which are available at our website at <http://www.nuskinenterprises.com>. In addition, stockholders may obtain a print copy of any of these charters by making a written request to Scott Pond, Investor Relations Manager, Nu Skin Enterprises, Inc., 75 West Center Street, Provo, Utah 84601.

The Board of Directors has determined that Daniel Campbell is an audit committee financial expert as such term is defined in Item 407(d)(5) of Regulation S-K promulgated by the Securities and Exchange Commission. The Audit Committee’s responsibilities include, among other things:
•selecting our independent registered public accounting firm;

• reviewing the activities and the reports of the independent registered public accounting firm;

•reviewing our quarterly and annual financial statements and our significant accounting policies, practices and procedures;

•approving in advance the audit and non audit services provided by the independent registered public accounting firm; and

•reviewing the adequacy of our internal controls and internal auditing methods and procedures.

The Compensation Committee’s responsibilities include, among other things:
• overseeing and approving compensation policies and programs;

• reviewing and approving corporate goals and objectives relevant to the compensation to be paid to our chief executive officer and other executive officers;

• establishing the salaries, bonuses, and other compensation to be paid to our chief executive officer as well as approving the compensation for the other executive officers;

• administering our incentive plans; and

• overseeing regulatory compliance with respect to executive compensation matters.

For a discussion of the processes and procedures for determining executive and director compensation and the role of compensation consultants in determining or recommending the amount or form of compensation, see “Compensation Discussion and Analysis” and “Compensation of Directors”.

The Nominating and Corporate Governance Committee’s responsibilities include, among other things:
•making recommendations to the Board of Directors about the size and membership criteria of the Board of Directors or any committee thereof;

• identifying and recommending candidates for the Board of Directors and committee membership, including evaluating director nominations received from stockholders;

• determining the compensation and benefits for services as a director;
• developing and recommending to the Board of Directors corporate governance principles applicable to us;

Our Director Nominations Process

As indicated above, the Nominating and Corporate Governance Committee of the Board of Directors oversees the director nomination process. This committee is responsible for identifying and evaluating candidates for membership on the Board of Directors and recommending to the Board of Directors nominees to stand for election.

Minimum Criteria for Members of the Board of Directors . Each candidate to serve on the Board of Directors must possess the highest personal and professional ethics, integrity and values, and be committed to serving the long-term interests of our stockholders. Other than the foregoing, there are no stated minimum criteria for director nominees, although the Nominating and Corporate Governance Committee may consider such other factors as it may deem appropriate, which may include, without limitation, professional experience, diversity of backgrounds, skills and experience at policy-making levels in business, government, financial, and in other areas relevant to our global operations, experience and history with our company, and stock ownership.

Process for Identifying, Evaluating and Recommending Candidates . The Nominating and Corporate Governance Committee will consider director candidates recommended by stockholders if properly submitted to the committee. Stockholders wishing to recommend candidates should do so in writing to the Nominating and Corporate Governance Committee, c/o D. Matthew Dorny, Corporate Secretary, Nu Skin Enterprises, Inc., 75 West Center Street, Provo, Utah 84601. Recommendations must include the proposed candidate’s name, detailed biographical data, work history, qualifications and corporate and charitable affiliations. The committee may also consider candidates proposed by current directors, management, employees and others. All such candidates who, after evaluation, are then recommended by the Nominating and Corporate Governance Committee and approved by the Board of Directors, will be included in our recommended slate of director nominees in our proxy statement.

Procedures for Stockholders to Nominate Director Candidates at our Annual Meetings . Stockholders of record may also nominate director candidates for our annual meetings of stockholders by following the procedures set forth in our Bylaws. Please refer to the section below entitled “Stockholder Proposals for 2009 Annual Meeting” for further information.
Additional Corporate Governance Information

We have also adopted the following:

Code of Conduct . This code applies to all of our employees, officers and directors, including our subsidiaries. As noted below, this code is available on our website. In addition, any substantive amendments we make to this code, and any material waivers we grant (including implicit waivers) to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions will be disclosed on our website.

Corporate Governance Guidelines . These guidelines govern our company and our Board of Directors on matters of corporate governance, including responsibilities, committees of the Board of Directors and their charters, director independence, director qualifications, director compensation and evaluations, director orientation and education, director access to management, director access to outside financial, business and legal advisors and management development and succession planning. Stock Retention Guidelines . In January 2005, we established equity retention guidelines applicable to our directors and executive officers. These guidelines provide that executive officers and directors must retain 50% of the net shares (after payment of the exercise price and related taxes) with respect to any equity award unless the individual holds a number of shares equal to the recommended levels set forth in the guidelines. The recommended levels are phased in over a five-year period for executive officers. Outstanding options are not counted in determining whether a director or officer holds shares equal to or greater than the recommended level. At the end of the five-year phase-in period, the recommended ownership levels are set at 100,000 shares for our Chief Executive Officer, 5,000 shares for directors, 20,000 shares for members of our executive management committee, and 10,000 shares for our other executive officers.

Each of the above is available on our website at <http://www.nuskinenterprises.com>. In addition, stockholders may obtain a print copy of any of the above, free of charge, by making a written request to Scott Pond, Investor Relations Manager, Nu Skin Enterprises, Inc., 75 West Center Street, Provo, Utah 84601.
Communications with Directors

Stockholders or other interested parties wishing to communicate with the Board of Directors, the non-management directors as a group, or any individual director may do so in writing by addressing the correspondence to that individual or group, c/o D. Matthew Dorny, Corporate Secretary, Nu Skin Enterprises, Inc., 75 West Center Street, Provo, Utah 84601. All such communications will be initially received and processed by our Corporate Secretary. Accounting, audit, internal accounting controls and other financial matters will be referred to our Audit Committee chairperson. Other matters will be referred to the Board of Directors, the non-management directors, or individual directors as appropriate.


MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion of our financial condition and results of operation should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, which are included in this Annual Report on Form 10-K.
Overview

We are a leading, global direct selling company with 2007 revenue of $1.16 billion and a global network of approximately 755,000 active independent distributors and preferred customers who purchase our products for resale and for personal use. Approximately 30,000 of these distributors are executive level distributors, who play an important leadership role in our distribution network and are critical to the growth of our business. We develop and market premium-quality personal care products under the Nu Skin brand, science-based nutritional supplements under the Pharmanex brand, and technology-related products and services under the Big Planet brand. We currently operate in over 45 markets throughout Asia, the Americas and Europe.

Our revenue depends on the number and productivity of our active independent distributors and executive distributor leaders. We have been successful in attracting and motivating distributors by:
• developing and marketing innovative, technologically advanced products;

• providing compelling initiatives, advanced technological tools and strong distributor support; and

• offering attractive incentives that motivate distributors to build sales organizations.

Our distributors market and sell our products and recruit new distributors based on the distinguishing benefits and innovative characteristics of our products. As a result, it is vital to our business that we continuously leverage our research and development resources to develop and introduce innovative products and provide our distributors with an attractive portfolio of products. We also offer unique initiatives and business tools, such as our technologically-advanced Pharmanex BioPhotonic Scanner (the “Scanner”), to help distributors effectively differentiate our earnings opportunity and product offering. If we experience delays or difficulties in introducing compelling products or attractive initiatives or tools into a market, this can have a negative impact on revenue and distributor recruiting. In addition, as a result of the global nature of our distributor incentives, the introduction of a new product or key initiative can negatively impact other markets or product lines to the extent our distributor leaders focus their efforts on the new product or initiative.

We have developed a global distributor compensation plan and other incentives designed to motivate our distributors to market and sell our products and to build sales organizations around the world and across product lines. Our extensive global distributor network helps us to rapidly introduce products and penetrate our markets with little up-front promotional expense. Similar to other companies in our industry, we experience a high level of turnover among our distributors. As a result, it is important that we regularly introduce innovative and compelling products and initiatives in order to maintain a compelling business opportunity that will attract new distributors. In addition, we have developed and continue to promote in many of our markets product subscription and loyalty programs that provide incentives for customers to commit to purchase a specific amount of products on a monthly basis. We believe these subscription programs have improved customer retention, have had a stabilizing impact on revenue, and have helped generate recurring sales for our distributors. Subscription orders represented 47% of our revenue in 2007.

In 2007, we generated approximately 77% of our revenue from our Asian markets, with sales in Japan representing approximately 38% of revenue. Because of the size of our foreign operations, operating results can be impacted negatively or positively by factors such as foreign currency fluctuations, in particular, fluctuations between the Japanese yen and the U.S. dollar, and economic, political and business conditions around the world. In addition, our business is subject to various laws and regulations related to network marketing activities and nutritional supplements that create certain risks for our business, including improper claims or activities by our distributors and the potential inability to obtain necessary product registrations. For more information about these risks and challenges we face, please refer to “Note Regarding Forward-Looking Statements.”

Over the last couple of years we have also taken steps to transform and align our business and operate more efficiently. We initially took steps in the first quarter of 2006 to eliminate organization redundancies, revamp administrative support functions, prioritize investments, and increase efficiencies in our supply chain. These steps involved a headcount reduction of 225 employees. In the fourth quarter of 2007, we took additional steps in connection with our transformation efforts to further reduce our overhead and improve our earnings per share. These steps included simplifying our operations in China and identifying additional areas for improved operational efficiencies globally. As a result of these steps, we reduced our headcount globally by approximately 1,000 employees. We continue to assess our operations and are taking steps to improve gross margins and selling expenses. We believe these steps will help to generate improved earnings per share in 2008.

We source the majority of our products from third-party manufacturers located in the United States. Due to Chinese government restrictions on the importation of finished goods applicable to the current scope of our business in China, we are required to manufacture the bulk of our own products for distribution in China. Cost of sales and gross profit may fluctuate as a result of changes in the ratio between self-manufactured products and products sourced from third-party suppliers. In addition, because we purchase a significant majority of our goods in U.S. dollars and recognize revenue in local currencies, we are subject to exchange rate risks in our gross margins. Because our gross margins vary from product to product and are higher in some markets such as Japan, changes in product mix and geographic revenue mix can impact our gross margins.

Selling expenses are our most significant expense and are classified as operating expenses. Selling expenses include distributor commissions as well as wages, benefits, bonuses and other labor and unemployment expenses we pay to employed sales representatives in China. Our global compensation plan, which we employ in all of our markets except China, is an important factor in our ability to attract and retain distributors. We pay monthly commissions to several levels of distributors on each product sale based upon a distributor’s personal and group product volumes, as well as the group product volumes of up to six levels of executive distributors in such distributor’s downline sales organization. We do not pay commissions on sales materials, which are sold to distributors at or near cost. Small fluctuations occur in the amount of commissions paid as the network of distributors actively purchasing products changes from month to month. However, due to the size of our distributor force of approximately 755,000 active distributors, the fluctuation in the overall payout is relatively small. The overall payout has typically averaged from 41% to 44% of global product sales. From time to time, we make modifications and enhancements to our global compensation plan in an effort to help motivate distributors and develop leadership characteristics, which can have an impact on selling expenses.

Distributors also have the opportunity to make retail profits by purchasing products from us at wholesale and selling them to customers with a retail mark-up. We do not account for nor pay additional commissions on these retail mark-ups received by distributors. In many markets, we also allow individuals who are not distributors, whom we refer to as “preferred customers”, to buy products directly from us at wholesale or discounted prices. We pay commissions on preferred customer purchases to the referring distributors.

Labor expenses are the most significant portion of our general and administrative expenses. Promotion and advertising expenses include costs of distributor conventions held in various markets worldwide, which we expense in the period in which they are incurred. Because our various distributor conventions are not always held during each fiscal year, or in the same period each year, their impact on our general and administrative expenses may vary from year to year and from quarter to quarter. For example, we held our global distributor convention in September 2007 and will not have another global convention until the fall of 2009 as we currently plan to hold a global convention every other year. In addition, we hold regional conventions and conventions in our major markets at different times during the year. These conventions have significant expenses associated with them. Because we have not incurred expenses for these conventions during every fiscal year or in comparable interim periods, year-over-year comparisons have been impacted accordingly.

Provision for income taxes depends on the statutory tax rates in each of the jurisdictions in which we operate. For example, statutory tax rates in 2007 were approximately 17.5% in Hong Kong, 25% in Taiwan, 27.5% in South Korea, 46% in Japan and 25% in China. For the years 2006 through 2008 we are subject to a reduced tax rate of 13.5% in China, after which time we will be subject to the full statutory rate. We are subject to taxation in the United States at the statutory corporate federal tax rate of 35% and we pay taxes in multiple states within the United States at various tax rates. Our overall effective tax rate was 35.9% for the year ended December 31, 2007.
Critical Accounting Policies

The following critical accounting policies and estimates should be read in conjunction with our audited Consolidated Financial Statements and related Notes thereto. Management considers the most critical accounting policies to be the recognition of revenue, accounting for income taxes, accounting for intangible assets and accounting for stock-based compensation. In each of these areas, management makes estimates based on historical results, current trends and future projections.

Revenue . We recognize revenue when products are shipped, which is when title and risk of loss pass to our independent distributors. With some exceptions in various countries, we offer a return policy whereby distributors can return unopened and unused product for up to 12 months subject to a 10% restocking fee. Reported revenue is net of returns, which have historically been less than 5% of gross sales. A reserve for product returns is accrued based on historical experience. We classify selling discounts as a reduction of revenue. Our selling expenses are computed pursuant to our global compensation plan for our distributors, which is focused on remunerating distributors based primarily upon the selling efforts of the distributors and the volume of products purchased by their downlines, and not their personal purchases.

Income Taxes . We account 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 In June 2006, the FASB issued FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS 109" (“FIN 48”). We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we recognized a $2.6 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balances of retained earnings and additional paid in capital.

We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With a few exceptions, we are no longer subject to U.S. federal, state and local income tax examination by tax authorities for years before 2004. In major foreign jurisdictions, we are no longer subject to income tax examinations for years before 2001. We are currently under examination in certain foreign jurisdictions; however, the final outcomes of these reviews are not yet determinable.

At December 31, 2007, we had $31.9 million in unrecognized tax benefits of which $9.1 million, if recognized, would affect the effective tax rate. During the year ended December 31, 2007, we recognized approximately $0.5 million in interest and penalties. We had approximately $2.7 million of accrued interest and penalties related to uncertain tax positions at December 31, 2007. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.

We are subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. We account for such contingent liabilities in accordance with FIN 48, and believe we have appropriately provided for income taxes for all years. Several factors drive the calculation of our tax reserves. Some of these factors include: (i) the expiration of various statutes of limitations; (ii) changes in tax law and regulations; (iii) issuance of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors may result in adjustments to our reserves, which would impact our reported financial results.

Intangible Assets . Under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), our goodwill and intangible assets with indefinite useful lives are not amortized. Our intangible assets with finite lives are recorded at cost and are amortized over their respective estimated useful lives and are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (see Note 5 to the Consolidated Financial Statements).


We are required to make judgments regarding the useful lives of our intangible assets. With the implementation of SFAS 142, we determined certain intangible assets to have indefinite lives based upon our analysis of the requirements of SFAS No. 141, “Business Combinations” (“SFAS 141”) and SFAS 142. Under the provisions of SFAS 142, we are required to test these assets for impairment at least annually. The annual impairment tests were completed and did not result in an impairment charge. To the extent an impairment is identified in the future, we will record the amount of the impairment as an operating expense in the period in which it is identified.

Stock-Based Compensation . Effective January 1, 2006, we adopted the fair value recognition provisions of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method. Under this method we recognize compensation expense for all share-based payments granted after January 1, 2006 and prior to but not yet vested as of January 1, 2006, in accordance with SFAS 123R. Under the fair value recognition provisions of SFAS 123R, we recognize stock-based compensation net of any estimated forfeitures on a straight-line basis over the requisite service period of the award. The fair value of our stock-based compensation expense is based on estimates using the Black-Scholes option-pricing model. This option-pricing model requires the input of highly subjective assumptions including the option’s expected life, risk-free interest rate, expected dividends and price volatility of the underlying stock. The stock price volatility assumption was determined using the historical volatility of our common stock. enterprise’s activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting of income taxes. We pay income taxes in many foreign jurisdictions based on the profits realized in those jurisdictions, which can be significantly impacted by terms of intercompany transactions among our affiliates around the world. Deferred tax assets and liabilities are created in this process. As of December 31, 2007, we had net deferred tax assets of $72.7 million. These net deferred tax assets assume sufficient future earnings will exist for their realization, as well as the continued application of current tax rates. In certain foreign jurisdictions valuation allowances have been recorded against the deferred tax assets specifically related to use of net operating losses. When we determine that there is sufficient taxable income to utilize the net operating losses, the valuation allowances will be released. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination was made.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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, 2007 filed with the Securities and Exchange Commission (“SEC”) on February 29, 2008, and our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report.
Overview

Revenue for the three and nine-month periods ended September 30, 2008 increased 7% and 9% to $310.3 million and $930.1 million compared to the same periods in 2007, respectively. Foreign currency exchange rate fluctuations positively impacted revenue by 2% and 5%, respectively, for the three and nine-month periods ended September 30, 2008. Strong growth in the United States, Canada, Latin America, Europe, South Korea and South East Asia drove our overall increase in revenue. Solid growth trends in our personal care product line, including the continued demand for the Galvanic Spa System II as well as the Tru Face Essence line, helped fuel the year-over-year improvement in these markets. Revenue results were negatively impacted by significant declines in local currency revenue in Japan and China.

Earnings per share for the third quarter and first nine months of 2008 were $0.26 and $0.79 compared to $0.21 and $0.57 for the same periods in 2007. The increase in earnings is largely due to our business transformation initiatives, which have contributed significantly to our improved operating margins, as well as the overall increase in revenue.

Foreign currency exchange rate fluctuations positively impacted revenue in the region for the three- and nine-month periods ended September 30, 2008 by 2% and 6% compared to the same prior-year periods, as a significant strengthening of the yen offset the impact of a weakening of the South Korean won. Executive distributors in the region decreased 8% and active distributors remained level compared to the prior-year period.

Local currency revenue in Japan declined 12% for the three- and nine-month periods ended September 30, 2008 compared to the same periods in 2007, respectively. We continue to experience weakness in our distributor numbers and distributor activity in this market, with active and executive distributor counts decreasing 8% and 14%, respectively. We believe our business continues to be negatively affected by the increased regulatory and media scrutiny of the industry and by our increased focus on distributor compliance in response to this scrutiny and to the number of complaints to consumer centers regarding the activities of some of our distributors. During the quarter, we began to implement some new distributor initiatives that have been patterned after initiatives that have contributed to growth in our other markets in order to help generate increased distributor activity and productivity.

South Korea continues to post solid growth with local-currency revenue increasing 29% and 26% for the three- and nine-month periods ended September 30, 2008, respectively. Successful and consistent product launches in both nutritional and personal care categories have contributed to a strong sponsoring environment for our distributors and significant growth in the number of our distributor leaders. The number of active distributors increased 26% and the number of executive distributors increased 17% in the third quarter of 2008 compared to the same prior-year period.

Revenue in the United States for the third quarter of 2007 included approximately $5 million in sales to foreign distributors attending our international convention in the United States. Excluding these sales, revenue for the third quarter of 2008 would have increased by approximately 15% compared to the prior-year period. We continue to experience significant growth in the United States with strong sales in the personal care brand. The revenue growth is being driven by strong interest in our Galvanic Spa System II as well as complementary products such as Galvanic Spa Facial Gels , Tru Face Essence Ultra and Tru Face Line Corrector . These products provide highly demonstrable results and are generating significant consumer interest. This interest has also driven growth in our distributors, with active distributors in the United States increasing 6% and executive distributors increasing 12% in the third quarter of 2008 compared to the same prior-year period.

Local currency revenue increased by 41% and 38% in Canada and by 98% and 68% in Latin America for the three- and nine- month periods ended September 30, 2008 over the prior-year periods, respectively. The growth in Latin America can be attributed to our opening of operations in Venezuela and strength in our Mexico market. Revenue growth in Latin America also benefited from a product price increase of approximately 15%-20% on average in the second quarter of 2008. Similar to the United States, revenue growth in Canada and Latin America is also being driven by the strong sales in our Nu Skin brand personal care products.

In the third quarter of 2008, active and executive distributors in the Americas region increased 10% compared to the same prior-year period.

Foreign currency exchange rate fluctuations positively impacted revenue by approximately 5% and 6% in this region during the third quarter and first nine months of 2008, respectively. Active distributors decreased 15% and executive distributors increased 1% in the region.

On a local currency basis, revenue in Mainland China decreased 12% and 13% in the three- and nine- month periods ended September 30, 2008 compared to the same periods in 2007, respectively. Our revenue decline was primarily the result of a 20% decline in our preferred customers compared to the prior-year period. The number of employed sales representatives remained relatively level compared to the prior-year period. We currently have plans to introduce the Galvanic Spa System II to a limited number of sales leaders in China in the fourth quarter of 2008, with a general launch in the first quarter of 2009, which we expect will have a positive impact on revenue given its success in Hong Kong and other markets.

Local currency revenue in Taiwan was down 11% and 5% in the three- and nine- month periods ended September 30, 2008 compared to the same periods in 2007, respectively. We believe that the decline in Taiwan is primarily attributed to regulatory restrictions that currently prevent us from marketing the Galvanic Spa System II in this market and a softening of sales of our weight loss products. The third quarter executive distributor count in Taiwan was up 3%, while the number of active distributors was down 14% when compared to the prior-year period. Hong Kong local currency revenue was up 13% and 17%, for the three- and nine-month periods compared to the same prior-year periods, respectively, primarily as a result of the strength of our personal care initiatives. Executive distributors in Hong Kong were up 3% and the active distributors in Hong Kong remained level compared to the prior-year period.

We continue to experience strong growth throughout our European markets. Growth in these markets is being driven by strong interest in the Galvanic Spa System II as well as momentum generated from the expansion of our business in Eastern Europe, which includes the markets of Hungary, Romania, Russia, Slovakia and Poland. In November, we plan to open the Czech Republic. We also opened operations in South Africa during the first quarter.

CONF CALL

Scott Pond

Thanks, Madge. We appreciate you joining us. With us today are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Dan Chard, Executive Vice President of Distributor Success; and Joe Chang, Chief Scientific Officer.

During this call comments maybe made that include some forward-looking statements. These statements involve risks and uncertainties and actual results may differ materially from those discussed or anticipated. We encourage you to refer to today's earnings release and our SEC filings for a complete discussion of these risks.

And with that, I will turn the time over to Truman.

Truman Hunt

Thanks, Scott, and good morning everyone. We appreciate you joining us today. Despite the dark clouds that permeate economic news recently, we're pleased to report solid operating results for the third quarter and we're also pleased to project a bright future for Nu Skin Enterprises.

As our release indicates, we generated record third quarter revenue and remain on track to have a record revenue year in 2008. Quarterly revenue of $310.3 million represents 7% increase over the prior year period puts us on a trajectory to close the year strong and gives us great momentum as we head into 2009.

Note that currency cost us about $10 million sequentially from Q2 to Q3 on the top line so we're really pleased with top line results for the quarter. Earnings per share were $0.26 versus $0.21 in the third quarter of 2007. Excluding $0.08 of primarily non-cash foreign currency translation expense earnings per share would have come in well above the guidance we previously provided.

Wide swings in currency against the U.S. dollar had a significant non-cash impact to EPS which Ritch will walk you through in a moment.

While we obviously would prefer to avoid getting stung by currency volatility, we're pleased that our growing global diversity will help offset the impact of currency swings in the future.

We posted solid results in almost all of our regions in the third quarter. Virtually, all of our markets are showing improved performance with standout markets including the U.S., Canada, Latin America, Europe, South Korea and Southeast Asia. These markets have been consistently posting healthy double-digit gains and we believe this will continue.

Our personal care brand continues to lead the charge as evidenced by a 30% improvement over the prior year. This growth is driven by the continued surge in sales of the galvanic spa system and its associated skin care products.

This remarkable product reported $45 million in sales for the quarter representing 180% growth over the prior year. Last week, we added fuel to the fire that the galvanic spa has created. At a highly successful distributor convention for the Americas in Europe region, we introduced galvanic spa treatment gels that incorporate our new patent pending ageLOC technology.

Those who have followed us know that we are elevating the attack on the aging process by focusing our efforts on the sources of aging as opposed to just addressing the signs and symptoms of aging which is where the rest of the skin care nutrition worlds are focused.

Our R&D team working with researchers at Perdue University, have isolated an enzyme called arNOX that is a key contributor to the aging process. arNOX activity accelerates rapidly as we age and our new galvanic spa facial gels incorporating ageLOC technology will slow the age causing enzyme at its source.

Based on the initial response to this introduction, we're confident that our focus provides a compelling competitive advantage for our distributors. We look forward to presenting to our shareholders where we are headed in the future with this ageLOC platform and at investor day presentation on December 4.

During the regional convention I also had the opportunity to spend time with many of our distributor leaders and once again feel their enthusiasm and drive for the Nu Skin business. In a world that's full of a lot of doom and gloom right now, it's refreshing to be associated with a group of highly energized optimists who leave us feeling confident about the future for several reasons and I'd like to just share a couple of those reasons with you today.

First reason for our optimism is the Nu Skin Enterprises is a financially stable company. Throughout our nearly 25-year history, we've operated with conservative financial principles and we haven't borrowed heavily or relied on credit to grow our business and we have worked hard over the past couple of years to improve profitability. This means that we're well-positioned to continue to invest in growth while maintaining our dividend streams.

Second, during times of economic turbulence direct selling companies can do very well. I know this sentiment has been echoed recently by some of our direct selling peers. There is several reasons for this direct selling phenomenon, but for Nu Skin specifically, I think they can be boiled down to a few key factors.

First, what marketers call the lipstick effect indicates that people continue to invest in their appearance even in times of economic hardship. Personal care and beauty products are generally viewed as necessity items around the world. This bodes well for Nu Skin and for our strong skin care portfolio, particularly, with the current energy around the galvanic spa system which is an in-home and very economical alternative that provides visible benefits previously available only through high priced spa treatments.

Secondly, during tough economic times people look to direct selling for supplemental or replacement income. With Nu Skin's proven track record and generous compensation plan, we're seeing very high quality and highly motivated people joining our sales force.

Third, we are uniquely situated to provide compelling products in both of the key anti-aging product categories, skin care and nutrition. Our business is roughly equally weighted between these two categories whereas other direct selling companies are – tend to be 90% one or the other.

Our product strength in both personal care and nutrition helps us maintain a competitive advantage particularly in today's environment as consumers become increasingly aware of the connection between nutritional health and beauty.

Fourth, we're entering this period of economic turbulence with some winds in our back. In the fourth quarter of 2008, we anticipate growth north of 20% in the U.S. and local currency growth north of 25% in South Korea and north of 50% in Europe, Canada and Latin America. So this momentum will help us fare better than some of our competitors will.

Finally, I'm pleased with the progress our team is making to improve profitability. We're seeing the benefits of the business transformation efforts we initiated about two years ago. These benefits are evidenced in the year-over-year improvements in both our selling expenses and our G&A expenses. In 2009, we will continue to become more efficient to secure further operating margin improvement.

I know that many of our shareholders are looking for improvements in Japan and China, in particular, so let me just comment on these two markets briefly.

We're moving ahead with the fourth quarter introduction of the galvanic spa to sales leaders in China with the general launch of the spa in the first quarter of 2009. We are more positive today about improving activity in China than we have been in the past couple of quarters. Trends are headed in the right direction. Galvanic is being highly anticipated in China and will be a catalyst for growth. So we are on the right track in China and expect to see growth in this important market in 2009.

Our Japan business is stabilizing. Our strategy for Japan is essentially to do the same things there that are working so well everywhere else with a focus on distributor recruitment which is the first step in business growth.

We have seen improving recruiting trends sequentially and we saw distributor recruitment tick up in September on a year-over-year basis for the first year-over-year improvement in some time. So this bodes well for the future.

And when we look at Nu Skin sales, in particular, in Japan, Nu Skin sales are up year-over-year, a sign that the galvanic spa is taking hold in that market as well. Now the environment for direct selling in Japan remains difficult, but we are making progress and we will see improving trends as we move into 2009.

Other significant activities in the fourth quarter will include the opening of the Czech Republic which has been a solid direct selling market and the launch of Tru Face Essence Ultra in South Korea which will enable us to continue strong growth in that market. Tru Face Essence Ultra is the number three Nu Skin product globally that grew about 72% in the third quarter over the prior year. So this launch in South Korea will enable us to continue healthy trends there.

Okay, with that, I'd like to turn now the time over to Rich to provide some color on the quarter's results.

Ritch Wood

Thank you, Truman. Good morning, everyone. Here are the local currency revenue figures in our major market. In the north Asia region third quarter revenue in Japan was 11.2 billion Yen compared to 12.8 billion Yen in the same quarter of 2007. Quarterly revenue in South Korea was 40.7 billion Won versus 31.4 billion Won in the prior year.

In the Americas, the U.S. posted $48.5 million in revenue compared against $47.2 million in the prior year and note that in the prior year the U.S. revenue included $5 million of convention purchases by international distributors. Canada reported 4.5 million CAD in the quarter compared to 3.2 million CAD in the prior year and Latin America revenue was $4.5 million compared to $2.2 million in the prior quarter.

In our greater China region, mainland China revenue was 104.3 million RMB during the quarter versus 119.9 million RMB in the prior year. Quarterly revenue in Hong Kong was 102.5 million HKD compared to 91.2 million HKD in the same quarter last year. And Taiwan revenue was 718 million NT compared against 805 million NT in 2007.

Our gross margin for the quarter was 81.7%. This is mostly even sequentially and approximately 40 basis points lower than the prior year. As we have discussed in prior quarters, the year-over-year decline is attributable to a revenue shift this year from Japan which has higher gross margins to markets with slightly lower gross margins as well as the increase in the galvanic spa unit sales which have a slightly lower gross margin than the rest of our personal care products.

Selling expenses for the quarter were 42.6% compared against 43.1% in the third quarter of 2007. Improvements here are a result of management's compensation plan reengineering modification made in numerous markets as part of our ongoing transformation efforts.

G&A expenses for the quarter were $90.9 million or 29.3% of sales compared to 32.3% of sales in the prior year period and prior year overhead included approximately $5 million of convention related expenses. This 300 basis point improvement can be primarily attributed to management's transformation efforts over the last 2.5 years and a lack of a major convention in the current year. The company's operating margin was 9.8% for the third quarter. That's a 320 basis point improvement over the prior year.

During the quarter we sustained a net expense of $8.3 million in the other income expense line of our income statement. Let me try and break this out and explain it a little bit in more detail. $1.6 million of the $8.3 million is net interest expense for the quarter and the balance of $6.7 million is related to currency movement. This expense related to the translation of intercompany balance sheet accounts into US dollars at the end of the quarter.

As you know we have used our Yen denominated debt in the past with a natural hedge against our Japanese revenue stream. In addition, this Yen denominated liability is also used to offset intercompany receivable balances between Nu Skin's US subsidiaries and our various foreign market subsidiaries.

Near the end of the third quarter, we experienced some rare currency moves including the strengthening of the yen against the dollar while the dollar strengthened against most other currencies. Therefore, we incurred an expense associated with the strengthening of the dollar against our foreign denominated receivable balances, but because the yen did not move in the same direction as the other currencies, we did not have an offsetting benefit with our yen denominated liability.

So this translation of expense cost us $0.08 in the quarter. We're taking steps to minimize the impact of unusual currency swings in the future including seeking long-term accounting treatment for a portion of these receivables. This foreign currency expense is not an operational expense and will reverse if the dollar weakens back against these same currencies.

Our tax rate for the quarter was 24% compared to 30% in the prior year and that's slightly better than the guidance we provided. The lower tax rate is attributable to the FIN 48 tax reserves that were released during the quarter. And during the quarter we paid $7 million of dividends and repurchased $1.6 million of company stock.

Now as we speak to the fourth quarter, giving specific guidance is quite complicated due to the dramatic swing we've experienced just recently in foreign currency. Generally, as a management team, we try and provide as much transparency as possible to our analysts and shareholders as it relates to our thinking in the modeling of our business and we will try and provide the same level of transparency here.

By giving an EPS range would require us to be accurate in forecasting where foreign currency spot rates will be on December 31st. Since this is not possible or prudent, we will provide guidance on the operations of the company but not provide an earnings per share estimates for the quarter.

So with that backdrop, here is the guidance we feel like we can provide. Our business from a top line standpoint continues to perform very well. At the beginning of 2008 we were growing the business approximately 3% on a local currency basis and that rate has accelerated to approximately 5% in the third quarter. And we would expect that local currency revenue growth rate to continue or slightly accelerate here into the fourth quarter.

To-date this year we have enjoyed approximately 5% foreign currency benefit when compared to 2007 on our top line. However, given where currencies stand today, we expect currency to negatively impact our revenue approximately 3% to 5% in the fourth quarter which would put our U.S. dollar reported revenue in the $307 million to $312 million range.

While the dollar has strengthened significantly against many currencies around the world, we're fortunate that the yen has strengthened quite a bit against the dollar in the recent two weeks which has helped to offset the balance and – offset and even balance the overall currency impact to our revenue and operations.

We expect gross margins and distributor incentives to hold fairly consistent with the current trend therefore on the 81.6% to 81.8% range for gross margin and 42.5% to 42.7% range for distributor incentives in the fourth quarter.

In U.S. dollar terms, we would anticipate overhead expenses to be approximately consistent with the third quarter as well. We expect net interest expense will also be consistent around the $1.6 million level for the third quarter and foreign currency gain or loss will be dependent upon where foreign currency spot rates end on December 31st. And then the tax rate will return to historical averages of approximately 38% in the fourth quarter.

The third quarter foreign currency expense is disappointing as it masks possibly the best quarter in our history and I'm very encouraged by the geographic diversification of our business by the strengthening cash flow, a 57% improvement in operating margin which is indicative of the improvement we're making to streamline our operations and increase our profitability and the growth and improving trends we see in virtually every one of our markets in which we operate.

Our balance sheet is strong and we will enter 2009 with momentum. We believe we are well-positioned for the future and are in a solid position to drive shareholder value going forward and we look forward to sharing more of our thoughts with you on December 4th in New York City at our Annual Investor and Analyst Day. We invite you to join us there and if you're interested, you can contact Scott Pond who is our Director of Investor Relations.

We will now open the call up for questions.



SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

73796 Views