Nu Skin 2010 Annual Report - Direct Selling News

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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 annual revenue. 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 the Income Taxes Topic of the Financial Accounting Standards Codification. These standards establish financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. We take 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, 2010, we had net deferred tax assets of $59.9 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. We file income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. We are currently under examination by the United States Internal Revenue Service (the “IRS”) for the 2005, 2006, 2007 and 2008 tax years. 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 2005. Beginning with the tax year 2009, we entered into a voluntary program with the IRS called Compliance Assurance Process (“CAP”). The objective of CAP is to contemporaneously work with the IRS to achieve federal tax compliance and resolve all or most of the issues prior to filing of the tax return. We have elected to participate in the CAP program for tax years 2009 through 2011 and may elect to continue participating in CAP for future tax years. We are allowed to withdraw from the program at any time. In major foreign jurisdictions, we are no longer subject to income tax examinations for years before 2004. Along with the IRS examination, we are currently under examination in certain foreign jurisdictions; however, the outcomes of these reviews are not yet determinable. At December 31, 2010, we had $14.8 million in unrecognized tax benefits of which $2.4 million, if recognized, would affect the effective tax rate. In comparison, at December 31, 2009, we had $28.3 million in unrecognized tax benefits of which $4.4 million, if recognized, would affect the effective tax rate. During each of the years ended December 31, 2010 and 2009, we recognized approximately ($1.7) million and $0.1 million and $0.5 million in interest and penalties expenses/(benefits), respectively. We had approximately $1.6 million, $3.3 million and $3.2 million of accrued interest and penalties related to uncertain tax positions at December 31, 2010, 2009 and 2008, respectively. 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 relevant accounting standards 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. Acquired intangible assets may represent indefinite-lived assets, determinable-lived intangibles, or goodwill. Of these, only the costs of determinable-lived intangibles are amortized to expense over their estimated life. The value of indefinite-lived intangible assets and residual goodwill is not amortized, but is tested at least annually for impairment. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangibles. We test goodwill for impairment, at least annually, by reviewing the book value compared to the fair value at the reportable unit level. We test individual indefinite-lived intangibles at least annually by reviewing the individual book values compared to the fair value. Considerable management judgment is necessary to measure fair value. We did not recognize any impairment charges for goodwill or intangible assets during the periods presented. Stock-Based Compensation. All share-based payments to employees are recognized in the financial statements based on their fair values using an option-pricing model at the date of grant. We use a Black-Scholes-Merton option-pricing model to calculate the fair value of options. Stock based compensation expense is recognized net of any estimated forfeitures on a straight-line basis over the requisite service period of the award. 38
RESULTS OF OPERATIONS The following table sets forth our operating results as a percentage of revenue for the periods indicated:: Year Ended December 31, 2008 2009 2010 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.3 18.3 17.7 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.7 81.7 82.3 Operating expenses: Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.4 41.4 42.1 General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 29.2 28.4 26.1 Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.8 — Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.6 70.6 68.2 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 11.1 14.1 Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.0) (0.5) (0.6) Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . 8.1 10.6 13.5 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 3.8 4.6 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2% 6.8% 8.9% 2010 COMPARED TO 2009 OVERVIEW Revenue in 2010 increased 15% to $1.54 billion from $1.33 billion in 2009. Our revenue growth in 2010 was driven by the global launch of our ageLOC anti-aging products, including our ageLOC Transformation skin care system, which has generated sales of approximately $220 million since its introduction in the fourth quarter of 2009. We also introduced ageLOC Vitality, our first ageLOC nutritional product designed to address the internal sources of aging, in Japan, the United States, Canada, and certain of our markets in Europe and Latin America during the second half of 2010. Foreign currency exchange fluctuations had a 5% positive impact on revenue in 2010 compared to 2009. Our revenue growth rates were the highest in Mainland China, South Korea and the South Asia/Pacific region. We also saw improving trends in Japan, as the rate of local currency revenue decline in that market decreased compared to the prior year. Earnings per share in 2010 increased to $2.11 compared to $1.40 in 2009 on a diluted basis. The increase in earnings is largely the result of increased revenue, as discussed above, coupled with improved margins and controlled expenses. Earnings per share comparisons were also impacted by restructuring charges in 2009 totaling $6.8 million (net of taxes of $3.9 million), or $.11 per share, primarily related to transformation efforts to streamline our operations in Japan. REVENUE North Asia. The following table sets forth revenue for the North Asia region and its principal markets (U.S. dollars in millions): 2009 2010 Change Japan . . . . . . . . . . . . . . $ 461.9 $ 471.4 2% South Korea . . . . . . . 144.2 214.7 49% North Asia total . . . $ 606.1 $ 686.1 13% Foreign currency fluctuations positively impacted revenue by 8% in this region compared to the prior-year period. Currency fluctuations positively impacted revenue in Japan by 6% and in South Korea by 13% in 2010. Our active and executive distributor counts decreased 4% and 3%, respectively, in Japan in 2010 compared to 2009. In South Korea, our active and executive distributor counts increased 17% and 19%, respectively, comparing 2010 to 2009. Local currency revenue in Japan decreased 4% in 2010 compared to 2009. We continue to experience some weakness in Japan, as evidenced by the declines in both our active and executive distributors. The direct selling industry and most direct selling companies in Japan have been in decline for several years in this challenging market. Increased regulatory and media scrutiny of the industry continues to negatively impact the industry and our business. As a result of this increased scrutiny, we continue to focus on distributor compliance and have also been more cautious in both our corporate 39
Page 1:
NU SKIN ANNUAL REPORT 2010 ELEVATE
Page 4 and 5:
35,676 32,939 30,588 30,002 2007 20
Page 6 and 7:
BUILDING FOR THE FUTURE In 2011, we
Page 8 and 9:
$163M AGELOC GALVANIC SPA AND GELS
Page 10 and 11: 8 8
Page 12 and 13: 5 INCREASING OPERATIONAL EFFICIENCI
Page 14 and 15: * GAAP RECONCILATION TABLE 2007 200
Page 17 and 18: Can we sustain growth? Yes we can.
Page 19 and 20: UNITED STATES SECURITIES AND EXCHAN
Page 21 and 22: TABLE OF CONTENTS PART I 1 ITEM 1 B
Page 23 and 24: PART I ITEM 1. BUSINESS OVERVIEW We
Page 25 and 26: The following table summarizes our
Page 27 and 28: Other. We also offer a limited numb
Page 29 and 30: introduction of additional ageLOC a
Page 31 and 32: ness model utilizing sales employee
Page 33 and 34: in a manner to attract the general
Page 35 and 36: take longer than we anticipated. Pl
Page 37 and 38: chases, management services and con
Page 39 and 40: These declines could continue or in
Page 41 and 42: ous markets, including Japan, South
Page 43 and 44: creased scrutiny by the government.
Page 45 and 46: pact the cost associated with manuf
Page 47 and 48: on a sustained basis. Factors that
Page 49 and 50: negotiated contracts with shipping
Page 51 and 52: System failures could harm our busi
Page 53 and 54: consumption taxes based on an audit
Page 55 and 56: STOCK PERFORMANCE GRAPH Set forth b
Page 57 and 58: ITEM 7. MANAGEMENT’S DISCUSSION A
Page 59: estrictions on the importation of f
Page 63 and 64: South Asia/Pacific. The following t
Page 65 and 66: employees in Mainland China who had
Page 67 and 68: We currently have debt pursuant to
Page 69 and 70: the legal form of the transaction.
Page 71 and 72: closures related to vendor’s mult
Page 73 and 74: NU SKIN ENTERPRISES, INC. Consolida
Page 75 and 76: NU SKIN ENTERPRISES, INC. Consolida
Page 77 and 78: NU SKIN ENTERPRISES, INC. Notes to
Page 99 and 100: Report of Independent Registered Pu
Page 101 and 102: PART III The information required b
Page 103 and 104: corporated by reference to Exhibit
Page 105 and 106: *10.56 Form of 2010 Plan Director S
Page 107 and 108: BOARD OF DIRECTORS Blake M. Roney E
Page 109: 18 NU SKIN ENTERPRISES, INC. 75 WES
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