USANA HEALTH SCIENCES INC - Quarter Report: 2014 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended March 29, 2014

 

OR

 

 

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 May 5, 2014 was 13,922,660.

 

 

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USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended March 29, 2014

 

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 Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7—14
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15—22
Item 3	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4	Controls and Procedures	23
	PART II. OTHER INFORMATION
Item 6	Exhibits	24
Signatures		26

 

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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 28,			March 29,
		2013			2014
ASSETS
Current assets
Cash and cash equivalents		$	137,343		$	142,733
Securities held-to-maturity, net		8,642			4,428
Inventories		47,242			46,890
Prepaid expenses and other current assets		35,818			32,308
Total current assets		229,045			226,359
Property and equipment, net		59,180			58,843
Goodwill		18,243			17,933
Intangible assets, net		42,329			41,210
Deferred tax assets		5,519			5,695
Other assets		14,154			21,426
		$	368,470		$	371,466
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	9,502		$	6,083
Other current liabilities		86,369			73,861
Total current liabilities		95,871			79,944
Deferred tax liabilities		10,866			10,577
Other long-term liabilities		1,211			1,204
Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 13,886 as of December 28, 2013 and 13,981 as of March 29, 2014		14			14
Additional paid-in capital		54,691			58,383
Retained earnings		200,023			216,560
Accumulated other comprehensive income		5,794			4,784
Total stockholders’ equity		260,522			279,741
		$	368,470		$	371,466

 

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
		March 30,			March 29,
		2013			2014
Net sales		$	169,082		$	182,401
Cost of sales		30,261			33,828
Gross profit		138,821			148,573
Operating expenses:
Associate incentives		69,855			78,874
Selling, general and administrative		42,404			44,577
Total operating expenses		112,259			123,451
Earnings from operations		26,562			25,122
Other income (expense):
Interest income		78			212
Interest expense		—			(6		)
Other, net		(104		)	(81		)
Other income (expense), net		(26		)	125
Earnings before income taxes		26,536			25,247
Income taxes		8,757			8,710
Net earnings		$	17,779		$	16,537
Earnings per common share
Basic		$	1.30		$	1.19
Diluted		$	1.28		$	1.15
Weighted average common shares outstanding
Basic		13,643			13,919
Diluted		13,903			14,395
Comprehensive income:
Net earnings		$	17,779		$	16,537
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		31			(1,662		)
Tax benefit (expense) related to foreign currency translation adjustment		(66		)	652
Other comprehensive income (loss), net of tax		(35		)	(1,010		)
Comprehensive income		$	17,744		$	15,527

 

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

 

Three Months Ended March 29, 2014

 

(in thousands)

(unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
Balance at December 28, 2013		13,886		$	14		$	54,691		$	200,023		$	5,794		$	260,522
Net earnings										16,537						16,537
Other comprehensive income (loss), net of tax													(1,010		)	(1,010		)
Equity-based compensation expense							1,836									1,836
Common stock issued under equity award plans, including tax benefit of $1,856		95					1,856									1,856
Balance at March 29, 2014		13,981		$	14		$	58,383		$	216,560		$	4,784		$	279,741

 

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)

 

		Three Months Ended
		March 30,			March 29,
		2013			2014
Cash flows from operating activities
Net earnings		$	17,779		$	16,537
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		2,303			2,211
(Gain) loss on sale of property and equipment		(3		)	4
Equity-based compensation expense		2,369			1,836
Excess tax benefits from equity-based payment arrangements		(185		)	(1,856		)
Deferred income taxes		(819		)	(146		)
Changes in operating assets and liabilities:
Inventories		(6,522		)	45
Prepaid expenses and other assets		6,136			(3,339		)
Accounts payable		1,097			(3,704		)
Other liabilities		(1,850		)	(9,119		)
Net cash provided by (used in) operating activities		20,305			2,469
Cash flows from investing activities
Additions to notes receivable		(1,142		)	(1,429		)
Purchases of investment securities held-to-maturity		—			(1,488		)
Maturities of investment securities		—			5,701
Proceeds from sale of property and equipment		3			6
Purchases of property and equipment		(872		)	(979		)
Net cash provided by (used in) investing activities		(2,011		)	1,811
Cash flows from financing activities
Excess tax benefits from equity-based payment arrangements		185			1,856
Repurchase of common stock		(18,085		)	—
Net cash provided by (used in) financing activities		(17,900		)	1,856
Effect of exchange rate changes on cash and cash equivalents		(186		)	(746		)
Net increase in cash and cash equivalents		208			5,390
Cash and cash equivalents, beginning of period		70,839			137,343
Cash and cash equivalents, end of period		$	71,047		$	142,733
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	—		$	6
Income taxes		1,101			787

 

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 28, 2013, 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 March 29, 2014 and results of operations for the three months ended March 30, 2013 and March 29, 2014.  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 28, 2013.  The results of operations for the three months ended March 29, 2014, may not be indicative of the results that may be expected for the fiscal year 2014 ending January 3, 2015.

 

NOTE B — FAIR VALUE MEASURES

 

The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

 

·                  Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

·                  Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

·                  Level 3 inputs are unobservable and are used to measure fair value in situations where there is little, if any, market activity for the asset or liability at the measurement date.

 

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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 B — FAIR VALUE MEASURES — CONTINUED

 

As of December 28, 2013 and March 29, 2014, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:

 

					Fair Value Measurements Using:
		December 28, 2013			Level 1 Inputs			Level 2 Inputs			Level 3 Inputs
Money market funds included in cash equivalents		$	9,249		$	9,249		$	—		$	—
Term deposits included in cash equivalents		348			—			348			—

 

					Fair Value Measurements Using:
		March 29, 2014			Level 1 Inputs			Level 2 Inputs			Level 3 Inputs
Money market funds included in cash equivalents		$	14,603		$	14,603		$	—		$	—
Term deposits included in cash equivalents		1,440			—			1,440			—

 

There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the periods indicated.

 

The majority of the Company’s non-financial assets, which include goodwill, intangible assets, and property and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or tested at least annually for goodwill and indefinite-lived intangibles) such that a non-financial asset is required to be evaluated for impairment, an impairment is recorded to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. At December 28, 2013 and March 29, 2014, there were no non-financial assets measured at fair value on a non-recurring basis.

 

At December 28, 2013 and March 29, 2014, the Company’s financial instruments include cash equivalents, restricted cash, securities held-to-maturity, and notes receivable. The recorded values of cash equivalents and restricted cash approximate their fair values, based on their short-term nature. The carrying value of the notes receivable approximate fair value because the variable interest rates in the notes reflect current market rates.  Securities held-to-maturity consist of certificates of deposits. The fair value of a certificate of deposit is determined based on the pervasive interest rates in the market, which is considered to be a Level 2 input. The carrying values of these certificates of deposit approximate their fair values due to their short-term maturities.

 

NOTE C — INVESTMENTS

 

The carrying amount, gross unrealized holding gains, gross unrealized holding losses, and fair value of held-to-maturity securities by major security type and class of security were as follows:

 

		As of December 28, 2013
		Amortized Cost			Unrecognized Holding Gains			Unrecognized Holding Losses			Estimated Fair Value
Certificates of Deposit		$	8,642		$	—		$	—		$	8,642
Total Held-to-Maturity Securities		$	8,642		$	—		$	—		$	8,642

 

		As of March 29, 2014
		Amortized Cost			Unrecognized Holding Gains			Unrecognized Holding Losses			Estimated Fair Value
Certificates of Deposit		$	4,428		$	—		$	—		$	4,428
Total Held-to-Maturity Securities		$	4,428		$	—		$	—		$	4,428

 

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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 — INVENTORIES

 

Inventories consist of the following:

 

		December 28,			March 29,
		2013			2014
Raw materials		$	13,824		$	12,975
Work in progress		8,147			8,585
Finished goods		25,271			25,330
		$	47,242		$	46,890

 

NOTE E — OTHER ASSETS

 

The Company has extended non-revolving credit to its supplier of nutrition bars of up to $7,000 to allow this supplier to acquire the necessary equipment to manufacture the USANA nutrition bars.  Notes receivable are valued at their unpaid principal balance plus any accrued but unpaid interest, which approximates fair value.  Interest accrues at an annual interest rate of LIBOR plus 400 basis points. The note has a maturity date of February 1, 2024 and will be repaid by a combination of cash payments and credits for the manufacture of USANA’s nutrition bars.  There is no prepayment penalty.  Notes receivable from this supplier as of December 28, 2013, and March 29, 2014 were $4,942 and $6,421, respectively.

 

The Company is building a state-of-the-art manufacturing and production facility in China, which is expected to become operational during the latter-half of 2015.  As part of this project, land-use rights totaling $7,158 have been purchased and will be amortized over 50 years.  Land-use rights are classified in “Other assets” line item in the Company’s consolidated balance sheets.

 

NOTE F — CONTINGENCIES

 

The Company is involved in various lawsuits, claims, and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, supplier relationships, distributors, competitor relationships, 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.

 

The Company has previously disclosed that the Securities and Exchange Commission is conducting a formal investigation, which involve possible issues regarding trading in the Company’s stock during late 2012 by certain of the Company’s directors, including the Chairman.  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 G — EQUITY BASED COMPENSATION

 

The Company utilizes a share-based compensation plan, which is more fully described in Note K to the Consolidated Financial Statements in Form 10-K for the year ended December 28, 2013.

 

Equity-based compensation expense for the fiscal quarters ended March 30, 2013, and March 29, 2014, was $2,369 and $1,836, respectively.  The related tax benefit for these periods was $812 and $617, respectively.

 

The following table shows the remaining unrecognized compensation expense on a pre-tax basis for all types of unvested equity awards outstanding as of March 29, 2014.  This table does not include an estimate for future grants that may be issued.

 

2014		$	6,784
2015		7,299
2016		5,420
2017		3,348
2018		541
		$	23,392

 

The cost above is expected to be recognized over a weighted-average period of 2.2 years.

 

The Company uses the Black-Scholes option pricing model to estimate the fair value of its equity awards.  The weighted-average fair value of stock-settled stock appreciation rights that were granted during the three months ended March 30, 2013, and March 29, 2014, was $13.34 and $17.73, respectively.  Following is a table that includes the weighted-average assumptions that the Company used to calculate fair value of equity awards that were granted during the periods indicated.

 

		Three Months Ended
		March 30,			March 29,
		2013			2014
Expected volatility (1)		43.7		%	39.9		%
Risk-free interest rate (2)		0.6		%	1.2		%
Expected life (3)		3.97 yrs			3.54 yrs
Expected dividend yield (4)		0.0		%	0.0		%
Weighted-average exercise price (5)		$	38.69		$	57.62

 

(1) The Company utilizes historical volatility of the trading price of its common stock.

(2) Risk-free interest rate is based on the U.S. Treasury yield curve with respect to the expected life of the award.

(3) Depending upon the terms of the award, expected life may be a weighted-average that includes historical settlement data of the Company’s equity awards and a hypothetical holding period for outstanding awards, or it may be calculated under the simplified method.

(4) The Company historically has not paid dividends.

(5) Exercise price is the closing price of the Company’s common stock on the date of grant.

 

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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 — EQUITY BASED COMPENSATION — CONTINUED

 

A summary of the Company’s stock option and stock-settled stock appreciation right activity is as follows:

 

		Shares		Weighted- average exercise price			Weighted-average remaining contractual term		Aggregate intrinsic value*
Outstanding at December 28, 2013		1,827		$	37.37		2.6		$	74,160
Granted		669		57.62
Exercised		(160	)	28.83
Forfeited		(20	)	27.33
Expired		—		—
Outstanding at March 29, 2014		2,316		$	43.90		3.0		$	70,387
Exercisable at March 29, 2014		424		$	37.96		1.9		$	15,280

 

* Aggregate intrinsic value is defined as the difference between the current market value at the reporting date (the closing price of the Company’s common stock on the last trading day of the period) and the exercise price of awards that were in-the- money.  The closing price of the Company’s common stock at December 28, 2013, and March 29, 2014, was $77.72 and $74.02, respectively.

 

The total intrinsic value of stock options and stock-settled stock appreciation rights exercised during the three months ended March 30, 2013, and March 29, 2014, was $1,150 and $6,800, respectively.

 

The total fair value of equity awards that vested during the three months ended March 30, 2013, and March 29, 2014, was $270 and $496, respectively.  This total fair value includes equity-based awards issued in the form of stock options and stock-settled stock appreciation rights.

 

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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 H — 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.

 

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
		March 30,			March 29,
		2013			2014
Net earnings available to common shareholders		$	17,779		$	16,537
Basic EPS
Shares
Common shares outstanding entire period		13,821			13,886
Weighted average common shares:
Issued during period		10			33
Canceled during period		(188		)	—
Weighted average common shares outstanding during period		13,643			13,919
Earnings per common share from net earnings - basic		$	1.30		$	1.19
Diluted EPS
Shares
Weighted average common shares outstanding during period - basic		13,643			13,919
Dilutive effect of in-the-money equity awards		260			476
Weighted average common shares outstanding during period - diluted		13,903			14,395
Earnings per common share from net earnings - diluted		$	1.28		$	1.15

 

Equity awards for 1,085 and 273 shares of stock were not included in the computation of diluted EPS for the quarters ended March 30, 2013, and March 29, 2014, 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 I — 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.

 

		Three Months Ended
		March 30,		March 29,
		2013		2014
USANA® Nutritionals		80	%	79	%
USANA Foods		12	%	13	%
Sensé — beautiful science®		6	%	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, Belgium, and the Netherlands.

 

·     Asia Pacific —

 

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

 

·                  Greater China — Hong Kong, Taiwan and China(2)

 

·                  North Asia — Japan and South Korea

 

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

(2)    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 I — SEGMENT INFORMATION - CONTINUED

 

Selected Financial Information

 

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

 

		Three Months Ended
		March 30,			March 29,
		2013			2014
Net Sales to External Customers
Americas and Europe		$	64,152		$	63,815
Asia Pacific
Southeast Asia Pacific		35,309			40,448
Greater China		62,985			70,847
North Asia		6,636			7,291
Asia Pacific Total		104,930			118,586
Consolidated Total		$	169,082		$	182,401

 

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

 

		Three Months Ended
		March 30,			March 29,
		2013			2014
Net sales:
United States		$	40,238		$	37,613
China		N/A			38,760
Hong Kong		41,597			23,524

 

		As of
		December 28,			March 29,
		2013			2014
Long-lived Assets:
China		$	61,716		$	66,587
United States		51,260			51,652

 

NOTE J — SUBSEQUENT EVENTS

 

On April 28, 2014, the Company’s Board of Directors authorized an increase in the amount available under its share repurchase plan to a total of $200,000.  Subsequent to March 29, 2014, and through May 5, 2014, the Company repurchased and retired 58 shares of common stock for a total investment of $4,047, at an average market price of $69.51 per share.

 

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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 28, 2013, 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 comprises 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 March 29, 2014, we had approximately 265,000 active Associates and approximately 78,000 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, Belgium, and the Netherlands

 

·                  Asia Pacific

 

·                  Southeast Asia/Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand

 

·                  Greater China — Hong Kong, Taiwan, and China (2)

 

·                  North Asia — Japan and South Korea

 

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

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

 

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:

 

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		Quarter Ended
		March 30,		March 29,
		2013		2014
Product Line
USANA® Nutritionals
Essentials		27	%	25	%
Optimizers		53	%	54	%
USANA Foods		12	%	13	%
Sensé — beautiful science®		6	%	6	%
All Other		2	%	2	%
Key Product
USANA® Essentials		18	%	16	%
Proflavanol®		12	%	13	%

 

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 which include: the general public’s heightened awareness and understanding of the connection between diet and long-term health, and the growing desire for a secondary source of income and 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 successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings.

 

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.  Associate incentives and selling, general and administrative expenses, however, are affected negatively by a weakening of the U.S. dollar and positively by a strengthening of the U.S. dollar.  During the quarter ended March 29, 2014, net sales outside of the United States represented 79.4% of consolidated net sales.  In our net sales discussions that follow, we approximate the impact of currency fluctuations on net sales by translating current year sales at the average exchange rates in effect during the comparable periods of the prior year.

 

Customers

 

Because we utilize a direct selling model for the distribution of our products, the success and growth of our business is primarily based on our ability to attract new Associates and retain existing Associates to sell and consume our products.  Notably, sales to Associates account for the majority of our product sales, representing approximately 90% of product sales during the quarter ended March 29, 2014.  Additionally, it is important to attract and retain Preferred Customers as consumers of our products.  Increases or decreases in product sales are typically the result of variations in product sales volumes relating to fluctuations in the number of active Associates and Preferred Customers purchasing our products.  The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial measure.

 

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The tables below summarize the changes in our active customer base by geographic region.  These numbers have been rounded to the nearest thousand as of the dates indicated.

 

		Active Associates By Region
		As of				As of				Change from		Percent
		March 30, 2013				March 29, 2014				Prior Year		Change
Americas and Europe		78,000		34.1	%	82,000		30.9	%	4,000		5.1	%
Asia Pacific:
Southeast Asia Pacific		56,000		24.4	%	64,000		24.2	%	8,000		14.3	%
Greater China		87,000		38.0	%	110,000		41.5	%	23,000		26.4	%
North Asia		8,000		3.5	%	9,000		3.4	%	1,000		12.5	%
Asia Pacific Total		151,000		65.9	%	183,000		69.1	%	32,000		21.2	%
		229,000		100.0	%	265,000		100.0	%	36,000		15.7	%

 

		Preferred Customers By Region
		As of				As of				Change from		Percent
		March 30, 2013				March 29, 2014				Prior Year		Change
Americas and Europe		55,000		82.1	%	61,000		78.2	%	6,000		10.9	%
Asia Pacific:
Southeast Asia Pacific		7,000		10.4	%	10,000		12.8	%	3,000		42.9	%
Greater China		3,000		4.5	%	3,000		3.9	%	—		0.0	%
North Asia		2,000		3.0	%	4,000		5.1	%	2,000		100.0	%
Asia Pacific Total		12,000		17.9	%	17,000		21.8	%	5,000		41.7	%
		67,000		100.0	%	78,000		100.0	%	11,000		16.4	%

 

Current Focus and Recent Developments

 

Our primary objective, both on a short- and long-term basis, is to strengthen and grow our active customer counts throughout the world.  To this end, in August 2013 we announced and implemented several strategic changes to our business (referred to throughout this document as “2013 strategic changes”), which are aimed at simplifying our business model for our Associates and promoting customer loyalty, enjoyment and success with USANA.  These changes included: (i) simplification of our pricing structure, which included an overall 10% price reduction, while maintaining a price discount on products ordered through our monthly Auto Order program, (ii) a new reward based on the amount of a customer’s initial product order to then be credited on their subsequent two Auto Orders, and (iii) increased payout under and simplification of our Compensation Plan.  We refer to the Auto Order discount and initial order reward throughout this report collectively as “price discounts”.

 

We improved our Compensation Plan in several ways, including: (i) paying higher compensation to newer Associates, (ii) increasing compensation for Associates who grow their business through our Auto Order program, and (iii) simplifying the commission qualification requirements under the plan, resulting in more Associates earning compensation.  Additionally, we simplified our rank advancement system to make it easier for Associates to advance in our business, and we added new recognition benefits for Associate leaders.

 

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