USANA HEALTH SCIENCES INC - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 28, 2013

 

OR

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                       

 

Commission file number: 0-21116

 

 

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

3838 West Parkway Blvd., Salt Lake City, Utah 84120

(Address of principal executive offices, Zip Code)

 

 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The number of shares outstanding of the registrant’s common stock as of November 1, 2013 was 13,872,365.

 

 

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USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended September 28, 2013

 

INDEX

 

		Page
PART I. FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Comprehensive Income — Quarter Ended	4
	Condensed Consolidated Statements of Comprehensive Income — Nine Months Ended	5
	Condensed Consolidated Statement of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8-13
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4	Controls and Procedures	24
PART II. OTHER INFORMATION
Item 6	Exhibits	25-26
Signatures		27

 

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PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except par value)

(unaudited)

 

		As of			As of
		December 29,			September 28,
		2012			2013
ASSETS
Current assets
Cash and cash equivalents		$	70,839		$	115,349
Inventories		36,481			45,671
Prepaid expenses and other current assets		25,225			35,105
Total current assets		132,545			196,125
Property and equipment, net		61,751			60,432
Goodwill		17,890			18,105
Intangible assets, net		42,085			42,078
Deferred tax assets		5,956			3,562
Other assets		7,128			11,031
		$	267,355		$	331,333
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	7,040		$	8,061
Other current liabilities		63,804			74,474
Total current liabilities		70,844			82,535
Deferred tax liabilities		10,001			9,022
Other long-term liabilities		938			1,127
Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 13,821 as of December 29, 2012 and 13,860 as of September 28, 2013		14			14
Additional paid-in capital		43,822			52,848
Retained earnings		134,800			179,741
Accumulated other comprehensive income		6,936			6,046
Total stockholders’ equity		185,572			238,649
		$	267,355		$	331,333

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in thousands, except per share data)

(unaudited)

 

		Quarters Ended
		September 29,			September 28,
		2012			2013
Net sales		$	165,175		$	173,691
Cost of sales		30,343			31,491
Gross profit		134,832			142,200
Operating expenses:
Associate incentives		70,406			76,361
Selling, general and administrative		40,342			41,145
Total operating expenses		110,748			117,506
Earnings from operations		24,084			24,694
Other income (expense):
Interest income		64			119
Other, net		203			(43		)
Other income (expense), net		267			76
Earnings before income taxes		24,351			24,770
Income taxes		6,861			8,017
Net earnings		$	17,490		$	16,753
Earnings per common share
Basic		$	1.22		$	1.22
Diluted		$	1.18		$	1.16
Weighted average common shares outstanding
Basic		14,365			13,751
Diluted		14,884			14,393
Comprehensive income:
Net earnings		$	17,490		$	16,753
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		1,312			1,371
Tax benefit (expense) related to foreign currency translation adjustment		(402		)	(552		)
Other comprehensive income (loss), net of tax		910			819
Comprehensive income		$	18,400		$	17,572

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in thousands, except per share data)

(unaudited)

 

		Nine Months Ended
		September 29,			September 28,
		2012			2013
Net sales		$	480,196		$	531,909
Cost of sales		85,633			93,657
Gross profit		394,563			438,252
Operating expenses:
Associate incentives		209,316			224,017
Selling, general and administrative		115,150			126,527
Total operating expenses		324,466			350,544
Earnings from operations		70,097			87,708
Other income (expense):
Interest income		173			278
Other, net		4			(311		)
Other income (expense), net		177			(33		)
Earnings before income taxes		70,274			87,675
Income taxes		22,288			28,933
Net earnings		$	47,986		$	58,742
Earnings per common share
Basic		$	3.27		$	4.31
Diluted		$	3.19		$	4.16
Weighted average common shares outstanding
Basic		14,673			13,636
Diluted		15,064			14,132
Comprehensive income:
Net earnings		$	47,986		$	58,742
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		1,156			(1,070		)
Tax benefit (expense) related to foreign currency translation adjustment		(334		)	180
Other comprehensive income (loss), net of tax		822			(890		)
Comprehensive income		$	48,808		$	57,852

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 28, 2013

 

(in thousands)

(unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
Balance at December 29, 2012		13,821		$	14		$	43,822		$	134,800		$	6,936		$	185,572
Net earnings										58,742						58,742
Other comprehensive income (loss), net of tax													(890		)	(890		)
Equity-based compensation expense							6,113									6,113
Common stock repurchased and retired		(414	)				(4,284		)	(13,801		)				(18,085		)
Common stock issued under equity award plans, including tax benefit of $6,769		453					7,223									7,223
Tax impact of canceled vested equity awards							(26		)							(26		)
Balance at September 28, 2013		13,860		$	14		$	52,848		$	179,741		$	6,046		$	238,649

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		Nine Months Ended
		September 29,			September 28,
		2012			2013
Cash flows from operating activities
Net earnings		$	47,986		$	58,742
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		6,608			6,870
(Gain) loss on sale of property and equipment		(106		)	(23		)
Equity-based compensation expense		8,184			6,113
Excess tax benefits from equity-based payment arrangements		(2,779		)	(7,570		)
Common stock awarded to Associates		100			—
Deferred income taxes		2,255			1,196
Changes in operating assets and liabilities:
Inventories, net		4,462			(9,999		)
Prepaid expenses and other assets		(9,223		)	(9,153		)
Accounts payable		(1,063		)	1,048
Other liabilities		7,199			17,369
Net cash provided by operating activities		63,623			64,593
Cash flows from investing activities
Increase in notes receivable		—			(3,363		)
Proceeds from sale of property and equipment		148			47
Purchases of property and equipment		(6,811		)	(6,306		)
Net cash used in investing activities		(6,663		)	(9,622		)
Cash flows from financing activities
Proceeds from equity awards exercised		309			454
Excess tax benefits from equity-based payment arrangements		2,779			7,570
Repurchase of common stock		(35,501		)	(18,085		)
Borrowings on line of credit		1,842			—
Payments on line of credit		(599		)	—
Net cash used in financing activities		(31,170		)	(10,061		)
Effect of exchange rate changes on cash and cash equivalents		458			(400		)
Net increase in cash and cash equivalents		26,248			44,510
Cash and cash equivalents, beginning of period		50,353			70,839
Cash and cash equivalents, end of period		76,601			115,349
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	11		$	—
Income taxes		25,008			25,554

 

The accompanying notes are an integral part of these statements.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

NOTE A — ORGANIZATION, CONSOLIDATION, AND BASIS OF PRESENTATION

 

USANA Health Sciences, Inc. develops and manufactures high-quality nutritional and personal care products that are sold internationally through a global network marketing system, which is a form of direct selling. The Consolidated Financial Statements include the accounts and operations of USANA Health Sciences, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “USANA”) in two geographic regions: Americas and Europe and Asia Pacific, which is further divided into three sub-regions; Southeast Asia Pacific, Greater China, and North Asia.  Americas and Europe includes the United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands.  Southeast Asia Pacific includes Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. All significant intercompany accounts and transactions have been eliminated in this consolidation.

 

The condensed balance sheet as of December 29, 2012, derived from audited financial statements, and the unaudited interim consolidated financial information of the Company have been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Certain information and footnote disclosures that are normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting of normal recurring adjustments that are necessary to state fairly the Company’s financial position as of September 28, 2013 and results of operations for quarters and nine months ended September 29, 2012 and September 28, 2013. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2012.  The results of operations for the quarters and nine months ended September 28, 2013, may not be indicative of the results that may be expected for the fiscal year 2013 ending December 28, 2013.

 

NOTE B — INTANGIBLE ASSETS

 

Goodwill and indefinite-lived intangible assets are tested annually for impairment, or more frequently if impairment indicators are present.  Such indicators of impairment include, but are not limited to, changes in business climate, and operating or cash flow losses related to such assets.  Goodwill and indefinite lived intangible assets are not amortized.  Definite lived intangibles are amortized over their related useful lives.

 

During the third quarter of 2013, the annual test for impairment was performed.  The result of this test indicated that there was not an impairment of the value of goodwill or indefinite-lived intangible assets for any reporting unit.

 

NOTE C — CONTINGENCIES

 

The Company is involved in various lawsuits, claims, investigations and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, relationships with suppliers, distributors, relationships with competitors, employees and other matters. While complete assurance cannot be given to the outcome of these proceedings, management does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations.

 

On July 23, 2013, the Company disclosed that the Securities and Exchange Commission is conducting a formal investigation, which appears to involve possible issues regarding trading in the Company’s stock during late 2012 by certain of the Company’s directors, including the Chairman.  The Company, as well as certain of its directors and executives, have received subpoenas from the SEC to produce documents related to this matter. The Company and its directors are cooperating with the SEC in this matter. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome against the Company in this matter is remote.  As such, management believes that the ultimate outcome of the SEC investigation will not have a material impact on the Company’s financial position or results of operations.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE D —LONG-TERM DEBT AND LINE OF CREDIT

 

The Company has a line of credit with Bank of America. Interest is computed at the bank’s Prime Rate or LIBOR, adjusted by features specified in the Credit Agreement. The collateral for this line of credit is the pledge of the capital stock of certain subsidiaries of the Company, set forth in a separate pledge agreement with the bank.  On July 18, 2013, the Company entered into an amended credit agreement, which increased the amount that it may borrow under the credit facility to $75,000.  The only other modification to the amended credit agreement was that any new or existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation.  This resulted in a $3,400 reduction in the available borrowing limit in the third quarter of 2013 due to existing normal course of business guarantees in certain markets.  The Credit Agreement contains restrictive covenants based on adjusted EBITDA and a debt coverage ratio.

 

There was no outstanding debt on this line of credit at December 29, 2012 or at September 28, 2013.  The Company will be required to pay any balance on this line of credit in full at the time of maturity in April 2016 unless the line of credit is replaced or terms are renegotiated.

 

NOTE E — INVENTORIES

 

Inventories consist of the following:

 

		December 29,			September 28,
		2012			2013
Raw materials		$	9,228		$	12,142
Work in progress		7,703			7,771
Finished goods		19,550			25,758
		$	36,481		$	45,671

 

NOTE F — COMMON STOCK AND EARNINGS PER SHARE

 

Basic earnings per share are based on the weighted-average number of shares outstanding for each period. Shares that have been repurchased and retired during the periods specified below have been included in the calculation of the number of weighted-average shares that are outstanding for the calculation of basic earnings per share based on the time they were outstanding in any period. Diluted earnings per common share are based on shares that are outstanding (computed under basic EPS) and on potentially dilutive shares. Shares that are included in the diluted earnings per share calculations under the treasury stock method include equity awards that are in-the-money but have not yet been exercised.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE F — COMMON STOCK AND EARNINGS PER SHARE — CONTINUED

 

The following is a reconciliation of the numerator and denominator used to calculate basic earnings per share and diluted earnings per share for the periods indicated:

 

		Quarter Ended
		September 29,			September 28,
		2012			2013
Net earnings available to common shareholders		$	17,490		$	16,753
Basic EPS
Shares
Common shares outstanding entire period		14,940			13,821
Weighted average common shares:
Issued during period		229			344
Canceled during period		(804		)	(414		)
Weighted average common shares outstanding during period		14,365			13,751
Earnings per common share from net earnings - basic		$	1.22		$	1.22
Diluted EPS
Shares
Weighted average common shares outstanding during period - basic		14,365			13,751
Dilutive effect of in-the-money equity awards		519			642
Weighted average common shares outstanding during period - diluted		14,884			14,393
Earnings per common share from net earnings - diluted		$	1.18		$	1.16

 

Equity awards for 522 and 15 shares of stock were not included in the computation of diluted EPS for the quarters ended September 29, 2012, and September 28, 2013, respectively, due to the fact that their effect would be anti-dilutive.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE F — COMMON STOCK AND EARNINGS PER SHARE — CONTINUED

 

		Nine Months Ended
		September 29,			September 28,
		2012			2013
Net earnings available to common shareholders		$	47,986		$	58,742
Basic EPS
Shares
Common shares outstanding entire period		14,940			13,821
Weighted average common shares:
Issued during period		107			154
Canceled during period		(374		)	(339		)
Weighted average common shares outstanding during period		14,673			13,636
Earnings per common share from net earnings - basic		$	3.27		$	4.31
Diluted EPS
Shares
Weighted average common shares outstanding during period - basic		14,673			13,636
Dilutive effect of in-the-money equity awards		391			496
Weighted average common shares outstanding during period - diluted		15,064			14,132
Earnings per common share from net earnings - diluted		$	3.19		$	4.16

 

Equity awards for 1,357 and 445 shares of stock were not included in the computation of diluted EPS for the nine months ended September 29, 2012, and September 28, 2013, respectively, due to the fact that their effect would be anti-dilutive.

 

The Company has a stock repurchase plan in place that has been authorized by the Board of Directors.  During the first nine months of 2012, the Company repurchased and retired 877 shares of common stock for a total of $35,501, at an average market price of $40.48 per share.  During the first nine months of 2013, the Company repurchased and retired 414 shares of common stock for a total investment of $18,085, at an average market price of $43.68 per share.  The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis.  As of September 28, 2013, the remaining approved repurchase amount under the stock repurchase plan was $13,622.  There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE G — SEGMENT INFORMATION

 

USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a global network marketing system of independent distributors (“Associates”).  As such, management aggregates its operating segments into one reportable segment as management believes that the Company’s segments exhibit similar long-term financial performance and have similar economic characteristics.  Performance for a region or market is evaluated based on sales.  No single Associate accounted for 10% or more of net sales for the periods presented.  The table below summarizes the approximate percentage of total product revenue that has been contributed by the Company’s nutritional and personal care products for the periods indicated.

 

		Quarter Ended				Nine Months Ended
		September 29,		September 28,		September 29,		September 28,
		2012		2013		2012		2013
USANA® Nutritionals		80	%	79	%	79	%	80	%
USANA Foods		12	%	13	%	12	%	12	%
Sensé — beautiful science®		6	%	6	%	7	%	6	%

 

Selected financial information for the Company is presented for two geographic regions: Americas and Europe and Asia Pacific, with three sub-regions under Asia Pacific.  Individual markets are categorized into these regions as follows:

 

·                  Americas and Europe — United States, Canada, Mexico, Colombia (1), the United Kingdom, France (2), Belgium (2), and the Netherlands.

 

·                  Asia Pacific —

 

·                  Southeast Asia Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand (2)

 

·                  Greater China — Hong Kong, Taiwan and China(3)

 

·                  North Asia — Japan and South Korea

 

(1)   The Company commenced operations in Colombia at the beginning of the third quarter of 2013

(2)    The Company commenced operations in Thailand, France, and Belgium at the end of the first quarter 2012.

(3)    The Company’s business in China is that of BabyCare, its wholly-owned subsidiary.

 

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USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share data)

(unaudited)

 

NOTE G — SEGMENT INFORMATION - CONTINUED

 

Selected Financial Information

 

Financial information by geographic region is presented for the periods indicated below:

 

		Quarter Ended						Nine Months Ended
		September 29,			September 28,			September 29,			September 28,
		2012			2013			2012			2013
Net Sales to External Customers
Americas and Europe		$	62,490		$	66,294		$	183,586		$	197,215
Asia Pacific
Southeast Asia Pacific		35,709			40,230			102,232			113,014
Greater China		59,722			59,768			173,127			200,141
North Asia		7,254			7,399			21,251			21,539
Asia Pacific Total		102,685			107,397			296,610			334,694
Consolidated Total		$	165,175		$	173,691		$	480,196		$	531,909

 

The following table provides further information on markets representing ten percent or more of consolidated net sales and long-lived assets, respectively:

 

		Quarter Ended						Nine Months Ended
		September 29,			September 28,			September 29,			September 28,
		2012			2013			2012			2013
Net sales:
Hong Kong		$	44,944		$	21,554		$	132,298		$	109,089
United States		39,991			39,282			115,577			118,329
China		N/A			29,788			N/A			66,772

 

		As of
		December 29,			September 28,
		2012			2013
Long-lived Assets:
China		$	59,130		$	60,827
United States		46,559			48,969
Australia		15,121			13,324

 

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

 

The following discussion and analysis of USANA’s financial condition and results of operations is presented in six

 

sections:

 

·                  Overview

·                  Customers

·                  Current Focus and Recent Developments

·                  Results of Operations

·                  Liquidity and Capital Resources

·                  Forward-Looking Statements and Certain Risks

 

This discussion and analysis should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the year ended December 29, 2012, and our other filings, including Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission (“SEC”) through the date of this report.

 

Overview

 

We develop and manufacture high-quality, science-based nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling.  Our customer base is comprised of two types of customers: “Associates” and “Preferred Customers.”  Associates are independent distributors of our products who also purchase our products for their personal use.  Preferred Customers purchase our products strictly for their personal use and are not permitted to resell or to distribute the products.  As of September 28, 2013, we had approximately 245,000 active Associates and approximately 71,000 active Preferred Customers worldwide.  For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period, either for personal use or for resale.

 

We have ongoing operations in the following markets, which are grouped and presented as follows:

 

·                  Americas and Europe — United States, Canada, Mexico, Colombia(1), the United Kingdom, France(2), Belgium(2), and the Netherlands

 

·                  Asia Pacific

 

·                  Southeast Asia Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand(2)

 

·                  Greater China — Hong Kong, Taiwan, and China (3)

 

·                  North Asia — Japan and South Korea

 

(1)       We commenced operations in Colombia at the beginning of the third quarter of 2013.

 

(2)       We commenced operations in Thailand, France, and Belgium at the end of the first quarter of 2012.

 

(3)       Our business in China is that of BabyCare, our wholly-owned subsidiary.

 

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Table of Contents

 

Our primary product lines consist of USANAâ Nutritionals, USANA Foods, and Sensé — beautiful scienceâ (Sensé), which is our line of personal care products.  The USANA Nutritionals product line is further categorized into two separate classifications: Essentials and Optimizers.  The following tables summarize the approximate percentage of total product revenue that has been contributed by our major product lines and our top-selling products for the current and prior-year periods indicated:

 

		Nine Months Ended
		September 29,		September 28,
Product Line		2012		2013
USANA® Nutritionals
Essentials		28	%	27	%
Optimizers		51	%	53	%
USANA Foods		12	%	12	%
Sensé — beautiful science®		7	%	6	%
All Other		2	%	2	%
Key Product
USANA® Essentials		18	%	18	%
Proflavanol®		12	%	12	%

 

Other top-selling products include our BiOmega-3™, HealthPak 100™, and CoQuinone® 30.

 

We believe that our ability to attract and retain Associates and Preferred Customers to sell and consume our products is positively influenced by a number of factors.  Some of these factors include: the general public’s heightened awareness and understanding of the connection between diet and long-term health, the aging of the worldwide population as older people generally tend to consume more nutritional supplements, and the growing desire for a secondary source of income or small business ownership.

 

We believe that our high-quality products and our financially rewarding Associate Compensation Plan are the key components to attracting and retaining Associates.  We strive to ensure that our products are formulated with the latest science in nutrition research and to keep our product lines relatively compact, which we believe simplifies the selling and buying process for our Associates and Preferred Customers.  We also periodically make changes to our Compensation Plan in an effort to ensure that our plan is among the most rewarding in the industry, to encourage behavior that we believe leads to a more successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings.  For example, during the second quarter of 2012 we modified the Matching Bonus component of our Compensation Plan, changing it from a short-term incentive to a long-term incentive.  We now refer to this bonus as our Lifetime Matching Bonus, which was fully phased in during the fourth quarter of 2012.  Further, during the third quarter of 2013 we made several enhancements to our Compensation Plan, which are designed to simplify the plan and make it more rewarding for both new and established Associates.  These enhancements are discussed further under the Recent Developments section.  We believe that the changes we have made to our Compensation Plan over the last two years will help facilitate long-term growth for both our Associates and the Company.

 

To further support our Associates in building their businesses, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system.  These meetings are designed to assist Associates in their business development and to provide a forum for interaction with our Associate leaders and members of our management team.  We also provide low cost sales tools, including online sales, business management, and training tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates.  Although we provide training and sales tools, we ultimately rely on our Associates to sell our products, attract new customers to purchase our products, and educate and train new Associates.

 

Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and earnings can be significantly affected by fluctuations in currency exchange rates.  In general, net sales and gross profit are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar.  Currency

 

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