Nu Skin 2010 Annual Report - Direct Selling News

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NU SKIN ENTERPRISES, INC. Consolidated Statements of Cash Flows (U.S. dollars in thousands) Year Ended December 31, 2008 2009 2010 Cash flows from operating activities: Net income $ 65,347 $ 89,845 $ 136,051 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 30,393 28,557 29,616 Foreign currency (gains)/losses 18,409 (1,966) 3,681 Stock-based compensation 7,273 9,989 10,835 Deferred taxes (4,078) 12,350 (13,735) Changes in operating assets and liabilities: Accounts receivable 7,069 (7,043) (6,649) Inventories, net (14,910) 9,740 (4,293) Prepaid expenses and other 4,260 (3,850) 3,854 Other assets 1,699 (18,690) (1,631) Accounts payable (6,139) 3,602 (568) Accrued expenses (3,250) 8,598 13,777 Other liabilities (2,766) 2,812 16,945 Net cash provided by operating activities 103,307 133,944 187,883 Cash flows from investing activities: Purchase of property and equipment (16,007) (20,215) (53,783) Proceeds on investment sales 19,135 — — Purchases of investments (13,910) — — Net cash used in investing activities (10,782) (20,215) (53,783) Cash flows from financing activities: Payment of cash dividends (27,940) (29,006) (31,189) Repurchase of shares of common stock (6,094) (21,144) (58,516) Exercise of distributor and employee stock options 3,824 6,227 21,181 Income tax benefit of options exercised 227 1,101 6,908 Payments on long-term debt (32,711) (30,188) (37,401) Proceeds from long-term debt — — 30,000 Net cash used in financing activities (62,694) (73,010) (69,017) Effect of exchange rate changes on cash (2,572) 2,740 7,209 Net increase in cash and cash equivalents 27,259 43,459 72,292 Cash and cash equivalents, beginning of period 87,327 114,586 158,045 Cash and cash equivalents, end of period $ 114,586 $ 158,045 $ 230,337 The accompanying notes are an integral part of these consolidated financial statements. 54
NU SKIN ENTERPRISES, INC. Notes to Consolidated Financial Statements 1. THE COMPANY Nu Skin Enterprises, Inc. (the “Company”) is a leading, global direct selling company that develops and distributes premium-quality, innovative personal care products and nutritional supplements that are sold worldwide under the Nu Skin and Pharmanex brands and a small number of other products and services. The Company reports revenue from five geographic regions: North Asia, which consists of Japan and South Korea; Greater China, which consists of Mainland China, Hong Kong, Macau and Taiwan; Americas, which consists of the United States, Canada and Latin America; South Asia/Pacific, which consists of Australia, Brunei, Indonesia, Malaysia, New Zealand, the Philippines, Singapore and Thailand; and Europe, which consists of several markets in Europe as well as Israel, Russia and South Africa (the Company’s subsidiaries operating in these countries are collectively referred to as the “Subsidiaries”). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of the Company and the Subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. USE OF ESTIMATES The preparation of these financial statements, in conformity with accounting principles generally accepted in the United States of America, required management to make estimates and assumptions that affected the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates. CASH AND CASH EQUIVALENTS Cash equivalents are short-term, highly liquid instruments with original maturities of 90 days or less. INVENTORIES Inventories consist primarily of merchandise purchased for resale and are stated at the lower of cost or market, using the first-in, first-out method. The Company had reserves for obsolete inventory totaling $6.4 million and $10.5 million as of December 31, 2009 and 2010, respectively. Inventories consist of the following (U.S. dollars in thousands): December 31, 2009 2010 Raw materials . . . . . . . . . . . . . . . $ 31,557 $ 31,497 Finished goods . . . . . . . . . . . . . 74,104 82,978 $ 105,661 $ 114,475 PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives: Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . Computers and equipment . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . Scanners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 years 5 – 7 years 3 – 5 years Shorter of estimated useful life or lease term 3 years 3 – 5 years Expenditures for maintenance and repairs are charged to expense as incurred. When an asset is sold or otherwise disposed of, the cost and associated accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in the statement of income. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss is recognized if the carrying amount of the asset exceeds its fair value. GOODWILL AND OTHER 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 55
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NU SKIN ANNUAL REPORT 2010 ELEVATE
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35,676 32,939 30,588 30,002 2007 20
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BUILDING FOR THE FUTURE In 2011, we
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$163M AGELOC GALVANIC SPA AND GELS
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8 8
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5 INCREASING OPERATIONAL EFFICIENCI
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* GAAP RECONCILATION TABLE 2007 200
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Can we sustain growth? Yes we can.
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UNITED STATES SECURITIES AND EXCHAN
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TABLE OF CONTENTS PART I 1 ITEM 1 B
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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 and 60: estrictions on the importation of f
Page 61 and 62: RESULTS OF OPERATIONS The following
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: NU SKIN ENTERPRISES, INC. Consolida
Page 79 and 80: 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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