USANA HEALTH SCIENCES INC - Quarter Report: 2015 April (Form 10-Q)

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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 April 4, 2015

 

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: 001-35024

 

 

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 11, 2015 was 12,734,968.

 

 

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USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended April 4, 2015

 

INDEX

 

		Page
PART I. FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7-15
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4	Controls and Procedures	23-24
PART II. OTHER INFORMATION
Item 1	Legal Proceedings
Item 6	Exhibits	24
		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
		January 3,			April 4,
		2015			2015
ASSETS
Current assets
Cash and cash equivalents		$	111,126		$	128,569
Inventories		45,248			50,959
Prepaid expenses and other current assets		34,553			31,940
Total current assets		190,927			211,468
Property and equipment, net		71,164			73,374
Goodwill		17,941			18,055
Intangible assets, net		40,952			41,250
Deferred tax assets		5,933			5,861
Other assets		23,667			25,040
		$	350,584		$	375,048
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	7,779		$	9,474
Other current liabilities		100,926			100,878
Total current liabilities		108,705			110,352
Deferred tax liabilities		10,601			10,279
Other long-term liabilities		1,114			1,110
Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 12,633 as of January 3, 2015 and 12,666 as of April 4, 2015		13			13
Additional paid-in capital		61,613			64,733
Retained earnings		166,406			186,086
Accumulated other comprehensive income		2,132			2,475
Total stockholders’ equity		230,164			253,307
		$	350,584		$	375,048

 

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)

 

		Quarter Ended
		March 29,			April 4,
		2014			2015
Net sales		$	182,401		$	219,378
Cost of sales		33,828			38,364
Gross profit		148,573			181,014
Operating expenses:
Associate incentives		78,874			101,353
Selling, general and administrative		44,577			49,875
Total operating expenses		123,451			151,228
Earnings from operations		25,122			29,786
Other income (expense):
Interest income		212			154
Interest expense		(6		)	—
Other, net		(81		)	14
Other income (expense), net		125			168
Earnings before income taxes		25,247			29,954
Income taxes		8,710			10,274
Net earnings		$	16,537		$	19,680
Earnings per common share
Basic		$	1.19		$	1.56
Diluted		$	1.15		$	1.50
Weighted average common shares outstanding
Basic		13,919			12,648
Diluted		14,395			13,085
Comprehensive income:
Net earnings		$	16,537		$	19,680
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		(1,662		)	563
Tax benefit (expense) related to foreign currency		652			(220		)
translation adjustment
Other comprehensive income (loss), net of tax		(1,010		)	343
Comprehensive income		$	15,527		$	20,023

 

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 April 4, 2015

 

(in thousands)

(unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Value			Capital			Earnings			Income (Loss)			Total
Balance at January 3, 2015		12,633		$	13		$	61,613		$	166,406		$	2,132		$	230,164
Net earnings										19,680						19,680
Other comprehensive income (loss), net of tax													343			343
Equity-based compensation expense							2,210									2,210
Common stock issued under equity award plans		33														—
Tax benefit from equity award activity							910									910
Balance at April 4, 2015		12,666		$	13		$	64,733		$	186,086		$	2,475		$	253,307

 

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 29,			April 4,
		2014			2015
Cash flows from operating activities
Net earnings		$	16,537		$	19,680
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization		2,211			2,337
(Gain) loss on sale of property and equipment		4			25
Equity-based compensation expense		1,836			2,210
Excess tax benefits from equity-based payment arrangements		(1,856		)	(910		)
Deferred income taxes		(146		)	(577		)
Changes in operating assets and liabilities:
Inventories		45			(5,753		)
Prepaid expenses and other assets		(3,339		)	890
Income tax payable related to tax benefit from equity award activity		1,856			910
Accounts payable		(3,704		)	789
Other liabilities		(10,975		)	3,960
Net cash provided by (used in) operating activities		2,469			23,561
Cash flows from investing activities
Additions to notes receivable		(1,429		)	(1,547		)
Purchases of investment securities held-to-maturity		(1,488		)	—
Maturities of investment securities		5,701			—
Proceeds from sale of property and equipment		6			—
Purchases of property and equipment		(979		)	(5,842		)
Net cash provided by (used in) investing activities		1,811			(7,389		)
Cash flows from financing activities
Excess tax benefits from equity-based payment arrangements		1,856			910
Net cash provided by (used in) financing activities		1,856			910
Effect of exchange rate changes on cash and cash equivalents		(746		)	361
Net increase (decrease) in cash and cash equivalents		5,390			17,443
Cash and cash equivalents, beginning of period		137,343			111,126
Cash and cash equivalents, end of period		$	142,733		$	128,569
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	6		$	—
Income taxes		787			2,996
Non-cash investing activities:
Credits on notes receivable		62			55
Accrued purchases of property and equipment		—			910

 

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 intercompany accounts and transactions have been eliminated in this consolidation.

 

The condensed consolidated balance sheet as of January 3, 2015, 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 (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.  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 April 4, 2015 and results of operations for the three months ended March 29, 2014 and April 4, 2015.

 

The interim 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 January 3, 2015.  The results of operations for the three months ended April 4, 2015, may not be indicative of the results that may be expected for the fiscal year 2015 ending January 2, 2016.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 includes a five-step process by which entities will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services.  The standard also will require enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption prohibited.  ASU 2014-09 permits companies the use of either a full retrospective or a modified retrospective approach to adopt this ASU, and the Company is currently evaluating which transition approach to use.  In April 2015, the FASB proposed deferring the effective date of ASU 2014-09 by one year and also proposed permitting early adoption of this ASU, but not before the original effective date.  The Company is currently evaluating the impact ASU 2014-09 will have on its consolidated financial statements.

 

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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

 

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.

 

As of January 3, 2015 and April 4, 2015, 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
					Inputs
		January 3, 2015			Level 1			Level 2			Level 3
Money market funds included in cash equivalents		$	4,833		$	4,833		$	—		$	—

 

					Fair Value Measurements Using
					Inputs
		April 4, 2015			Level 1			Level 2			Level 3
Money market funds included in cash equivalents		$	4,881		$	4,881		$	—		$	—

 

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 charge is recorded to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. At January 3, 2015 and April 4, 2015, there were no non-financial assets measured at fair value on a non-recurring basis.

 

The Company’s financial instruments include cash equivalents, accounts receivable, restricted cash, notes receivable, and accounts payable. The recorded values of cash equivalents, accounts receivable, restricted cash, and accounts payable 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.

 

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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 C — INVENTORIES

 

Inventories consist of the following:

 

		January 3,			April 4,
		2015			2015
Raw materials		$	15,127		$	18,259
Work in progress		7,545			6,702
Finished goods		22,576			25,998
		$	45,248		$	50,959

 

NOTE D — OTHER ASSETS

 

The Company has extended non-revolving credit to its supplier of nutrition bars to allow them to acquire equipment that is necessary to manufacture the USANA nutrition bars.  This relationship provides improved supply chain stability for USANA and creates a mutually beneficial relationship between the parties.  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 January 3, 2015, and April 4, 2015 were $8,519 and $9,011, respectively

 

This third-party supplier is considered to be a variable interest entity; however, the Company is not the primary beneficiary due to the inability to direct the activities that most significantly affect the third-party supplier’s economic performance. Additionally, the Company does not absorb a majority of the third-party supplier’s expected losses or returns. Consequentially, the financial information of the third-party supplier is not consolidated. The maximum exposure to loss as a result of the Company’s involvement with the third-party supplier is limited to the carrying value of the note receivable due from the third-party supplier.

 

The Company is building a state-of-the-art manufacturing and production facility in China, which is expected to become operational in early 2016.  As part of this project, land use rights totaling $7,378, and $7,451 as of January 3, 2015 and April 4, 2015, respectively, have been purchased and will be amortized over 50 years.  Land-use rights are classified within the “Other assets” line item in the Company’s condensed consolidated balance sheets.

 

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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 E — LINE OF CREDIT

 

The Company has a $75,000 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. Part of the credit agreement is that any existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation. This resulted in a $4,575, and $4,366 reduction in the available borrowing limit as of January 3, 2015 and April 4, 2015, respectively, 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 January 3, 2015 or at April 4, 2015.  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 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. The Company establishes reserves when a particular contingency is probable and estimable. The Company has not accrued for any contingency at April 4, 2015 as the Company does not consider any contingency to be probable nor estimable. The Company faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated. 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 August 7, 2014, a purported shareholder derivative lawsuit was filed in the Third Judicial District Court of Salt Lake County, State of Utah, against certain of the Company’s directors and officers.  The derivative complaint, which also names USANA as a nominal defendant but is asserted on USANA’s behalf, contains claims of breach of fiduciary duty, waste of corporate assets and unjust enrichment against the defendant directors and officers in connection with certain equity awards granted by the Compensation Committee of the Company’s Board of Directors in February 2014.  In October 2014, the Company filed a motion to dismiss the complaint and, in March 2015, the court granted that motion and dismissed the complaint without prejudice.  In April 2015, the plaintiffs filed a notice of appeal with the court, but, as of the date of this report, have not filed their appeal.   The Company believes the claims in the complaint are without merit and intends to vigorously defend the suit.  In the opinion of management, and 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 this lawsuit 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 January 3, 2015.

 

Equity-based compensation expense for the three months ended March 29, 2014, and April 4, 2015, was $1,836, and $2,210 respectively.  The related tax benefit for these periods was $617, and $740, 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 April 4, 2015.  This table does not include an estimate for future grants that may be issued.

 

2015		$	5,664
2016		6,771
2017		4,484
2018		1,561
2019+		510
		$	18,990

 

The cost above is expected to be recognized over a weighted-average period of 1.9 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 29, 2014, and April 4, 2015, was $17.73 and $30.49, 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 29,			April 4,
		2014			2015
Expected volatility (1)		39.9		%	40.4		%
Risk-free interest rate (2)		1.2		%	1.1		%
Expected life (3)		3.54 yrs.			3.30 yrs.
Expected dividend yield (4)		0.0		%	0.0		%
Weighted-average exercise price (5)		$	57.62		$	102.10

 

(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, one of two methods will be used to calculate expected life:
		(i) a weighted-average that includes historical settlement data of the Company’s equity awards and a hypothetical holding period, or (ii) 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 January 3, 2015		1,555		$	49.20		2.9		$	82,564
Granted		110		102.10
Exercised		(55	)	41.60
Forfeited		(19	)	43.83
Expired		—		—
Outstanding at April 4, 2015		1,591		$	53.18		2.7		$	97,095
Exercisable at April 4, 2015		66		$	39.25		2.3		$	4,954

 

*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 January 3, 2015, and April 4, 2015, was $102.28 and $114.19, respectively.

 

The total intrinsic value of stock-settled stock appreciation rights exercised during the three months ended March 29, 2014, and April 4, 2015, was $6,800 and $3,345, respectively.

 

The total fair value of equity awards that vested during the three months ended March 29, 2014, and April 4, 2015, was $496 and $811, respectively.  This total fair value includes equity-based awards issued in the form of 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:

 

		Three Months Ended
		March 29,			April 4,
		2014			2015
Net earnings available to common shareholders		$	16,537		$	19,680
Weighted average common shares outstanding - basic		13,919			12,648
Dilutive effect of in-the-money equity awards		476			437
Weighted average common shares outstanding - diluted		14,395			13,085
Earnings per common share from net earnings - basic		$	1.19		$	1.56
Earnings per common share from net earnings - diluted		$	1.15		$	1.50

 

Equity awards for the following shares were not included in the computation of diluted EPS due to the fact that their effect would be anti-dilutive:

 

		Three Months Ended
		March 29,		April 4,
		2014		2015
		273		125

 

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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 29,		April 4,
		2014		2015
USANA® Nutritionals		79	%	81	%
USANA Foods		13	%	11	%
Sensé — beautiful science®		6	%	7	%

 

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, 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(1)

 

·                  North Asia — Japan and South Korea

 

(1)         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 29,			April 4,
		2014			2015
Net Sales to External Customers
Americas and Europe		$	63,815		$	63,524
Asia Pacific
Southeast Asia Pacific		40,448			45,339
Greater China		70,847			101,286
North Asia		7,291			9,229
Asia Pacific Total		118,586			155,854
Consolidated Total		$	182,401		$	219,378

 

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 29,			April 4,
		2014			2015
Net sales:
China		$	38,760		$	83,810
United States		$	37,613		$	36,302
Hong Kong		$	23,524		N/A

 

		As of
		January 3,			April 4,
		2015			2015
Long-lived Assets:
China		$	81,704		$	83,316
United States		$	53,322		$	56,779

 

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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 January 3, 2015, 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.  We have chosen this distribution method as we believe it is more conducive to meeting our vision as a company, which is improving the overall health and nutrition of individuals and families around the world.  Our customer base comprises two types of customers: “Associates” and “Preferred Customers.”  Associates share in our company vision by acting as independent distributors of our products in addition to purchasing 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 April 4, 2015, we had approximately 376,000 active Associates and approximately 86,000 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.

 

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

 

·                  Americas and Europe — United States, Canada, Mexico, Colombia, 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(1)

 

·                  North Asia — Japan and South Korea

 

(1)         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 as indicated:

 

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		Quarter ended
		March 29, 2014		April 4, 2015
Product Line
USANA® Nutritionals
Essentials		25	%	23	%
Optimizers		54	%	58	%
USANA Foods		13	%	11	%
Sensé — beautiful science®		6	%	7	%
All Other		2	%	1	%
Key Product
USANA® Essentials		16	%	15	%
Proflavanol®		13	%	13	%
BiOmega-3™		9	%	12	%

 

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 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, our operating results are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar.  During the quarter ended April 4, 2015, net sales outside of the United States represented 83.5% 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 sell our products exclusively to a customer base of independent Associates and Preferred Customers, to increase net sales we must either increase the number or the productivity of our Associates and Preferred Customers.  Increasing the productivity of our Associates and Preferred Customers has not been our primary focus.  Rather, we seek to increase the number of Associates and Preferred Customers who use our products.  We believe this focus is more consistent with our vision of improving the overall health and nutrition of individuals and families around the world.  Sales to Associates account for the majority of our product sales, representing approximately 92% of product sales during the quarter ended April 4, 2015.  The remainder of our sales are to Preferred Customers.  Increases or decreases in product sales are typically the result of variations in the volume of product sold relating to fluctuations in the

 

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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.

 

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 29, 2014				April 4, 2015				Prior Year		Change
Americas and Europe		82,000		30.9	%	86,000		22.9	%	4,000		4.9	%
Asia Pacific:
Southeast Asia Pacific		64,000		24.2	%	77,000		20.5	%	13,000		20.3	%
Greater China		110,000		41.5	%	201,000		53.4	%	91,000		82.7	%
North Asia		9,000		3.4	%	12,000		3.2	%	3,000		33.3	%
Asia Pacific Total		183,000		69.1	%	290,000		77.1	%	107,000		58.5	%
		265,000		100.0	%	376,000		100.0	%	111,000		41.9	%

 

		Preferred Customers By Region
		As of				As of				Change from		Percent
		March 29, 2014				April 4, 2015				Prior Year		Change
Americas and Europe		61,000		78.2	%	63,000		73.3	%	2,000		3.3	%
Asia Pacific:
Southeast Asia Pacific		10,000		12.8	%	12,000		14.0	%	2,000		20.0	%
Greater China		3,000		3.9	%	4,000		4.6	%	1,000		33.3	%
North Asia		4,000		5.1	%	7,000		8.1	%	3,000		75.0	%
Asia Pacific Total		17,000		21.8	%	23,000		26.7	%	6,000		35.3	%
		78,000		100.0	%	86,000		100.0	%	8,000		10.3	%

 

Current Focus and Recent Developments

 

Our primary objective is to increase the number of Associates and Preferred Customers who use our products throughout the world.  We have several strategies in place to support this objective, including:

 

·                  Our focus on personalizing our customer’s overall experience with USANA, which includes personalizing our product offering, Associate Compensation Plan, and our online business environment;

·                  Our investment in increasing our brand recognition, which includes our relationship as a Trusted Partner and Sponsor of The Dr. Oz Show; to make it easier for our Associates to talk about USANA with potential customers;

·                  Our development and offering of market-specific incentives and promotions for our Associates to incent sales and customer growth around the world; and

·                  Our continued focus on international expansion as we prepare to commence operations in Indonesia later this year. Indonesia will be USANA’s 20th market and represents a promising growth opportunity for us.

 

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