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 June 30, 2012
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)
Utah
87-0500306
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
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.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
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 August 2, 2012 was 14,450,595.
For the Quarterly Period Ended June 30, 2012
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1
Financial Statements (unaudited)
Consolidated Balance Sheets
3
Consolidated Statements of Comprehensive Income — Quarter Ended
4
Consolidated Statements of Comprehensive Income — Six Months Ended
5
Consolidated Statements of Stockholders’ Equity
6
Consolidated Statements of Cash Flows
7
Notes to 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
23
Item 4
Controls and Procedures
23—24
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
24
Item 6
Exhibits
25—26
Signatures
27
2
PART I. FINANCIAL INFORMATION`
Item 1. Financial Statements
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
As of
December 31,
June 30,
2011
2012
ASSETS
Current assets
Cash and cash equivalents
$
50,353
65,538
Inventories
36,968
33,805
Prepaid expenses and other current assets
18,738
24,163
Total current assets
106,059
123,506
Property and equipment, net
60,754
60,343
Goodwill
17,740
17,675
Intangible assets, net
42,637
41,846
Deferred tax assets
11,033
10,913
Other assets
6,273
6,729
244,496
261,012
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
7,952
6,408
Other current liabilities
51,744
60,341
Total current liabilities
59,696
66,749
Deferred tax liabilities
9,948
9,638
Other long-term liabilities
942
998
Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 14,940 as of December 31, 2011 and 14,350 as of June 30, 2012
15
14
Additional paid-in capital
49,257
47,742
Retained earnings
118,799
130,120
Accumulated other comprehensive income
5,839
5,751
Total stockholders’ equity
173,910
183,627
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
Quarters Ended
July 2,
Net sales
148,925
160,901
Cost of sales
26,208
28,073
Gross profit
122,717
132,828
Operating expenses:
Associate incentives
67,760
70,901
Selling, general and administrative
33,803
36,776
Total operating expenses
101,563
107,677
Earnings from operations
21,154
25,151
Other income (expense):
Interest income
54
71
Interest expense
(2
)
—
Other, net
(52
(293
Other income (expense), net
(222
Earnings before income taxes
24,929
Income taxes
7,298
8,184
Net earnings
13,856
16,745
Earnings per common share
Basic
0.89
1.14
Diluted
0.88
1.11
Weighted average common shares outstanding
15,530
14,691
15,752
15,090
Comprehensive income:
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
1,717
(851
Tax (expense) benefit related to foreign currency translation adjustment
(352
363
Other comprehensive income (loss), net of tax
1,365
(488
Comprehensive income
15,221
16,257
Six Months Ended
292,491
315,021
51,870
55,290
240,621
259,731
132,567
138,910
69,673
74,808
202,240
213,718
38,381
46,013
104
109
(8
(199
101
(90
38,482
45,923
13,276
15,427
25,206
30,496
1.60
2.06
1.58
2.01
15,720
14,827
15,964
15,192
2,581
(156
(560
68
2,021
(88
27,227
30,408
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Six Months Ended July 2, 2011 and June 30, 2012
Accumulated
Additional
Other
Common Stock
Paid-in
Retained
Comprehensive
Shares
Value
Capital
Earnings
Income (Loss)
Total
For the Six Months Ended July 2, 2011
Balance at January 1, 2011
15,985
16
51,222
90,207
5,357
146,802
Other comprehensive income, net of tax
Equity-based compensation expense
4,802
Common stock repurchased and retired
(827
(1
(8,725
(16,613
(25,339
Common stock issued under equity award plans, including tax benefit of $49
88
Tax impact of canceled vested equity awards
(509
Balance at July 2, 2011
15,173
46,878
98,800
7,378
153,071
For the Six Months Ended June 30, 2012
Balance at December 31, 2011
14,940
5,618
(677
(7,387
(19,175
(26,563
Common stock issued under equity award plans, including tax benefit of $336
87
375
(121
Balance at June 30, 2012
14,350
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
4,246
4,410
(Gain) loss on sale of property and equipment
9
(108
Excess tax benefits from equity-based payment arrangements
(48
(380
Deferred income taxes
(1,981
(4,673
Changes in operating assets and liabilities:
Inventories, net
(561
3,466
Prepaid expenses and other assets
4,109
(1,332
1,914
(1,565
Other liabilities
(6,295
8,014
Total adjustments
6,195
13,450
Net cash provided by operating activities
31,401
43,946
Cash flows from investing activities
Proceeds from sale of property and equipment
1
148
Purchases of property and equipment
(5,794
(3,447
Net cash used in investing activities
(5,793
(3,299
Cash flows from financing activities
Proceeds from equity awards exercised
39
48
380
Repurchase of common stock
Borrowings on line of credit
593
Net cash used in financing activities
(25,252
(25,551
Effect of exchange rate changes on cash and cash equivalents
366
89
Net increase in cash and cash equivalents
722
15,185
Cash and cash equivalents, beginning of period
24,222
Cash and cash equivalents, end of period
24,944
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
13,483
13,293
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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: North America/Europe and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia. North America/Europe includes the United States (including direct sales from the United States to the United Kingdom and the Netherlands), Canada, Mexico, France, and Belgium. 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 31, 2011, 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 present fairly the Company’s financial position as of June 30, 2012 and results of operations for quarters and six months ended July 2, 2011 and June 30, 2012. 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 31, 2011. The results of operations for the quarter and six months ended June 30, 2012, may not be indicative of the results that may be expected for the fiscal year 2012 ending December 29, 2012.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
NOTE B — REVISIONS
As disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2011, revisions have been made to the Company’s previously issued financial statements to record the impact of currency translation on intangible assets acquired as a part of the 2010 purchase of BabyCare Holdings, Ltd. These revisions had no effect on our earnings from operations, net earnings or earnings per share.
The following tables illustrate the effects of the revision on the Company’s consolidated financial statements for only those line items that were affected and have not been previously disclosed:
Consolidated Statements of Comprehensive Income
For the six months ended July 2, 2011
As Previously Reported
Adjustment
As Revised
26,211
1,016
1,005
Accumulated Other Comprehensive Income (Loss), Balance at July 2, 2011
4,726
2,652
Total Stockholders’ Equity, Balance at July 2, 2011
150,419
NOTE C — INVENTORIES
Inventories consist of the following:
Raw materials
9,670
8,897
Work in progress
6,917
6,349
Finished goods
20,381
18,559
NOTE D — 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. 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.
Net earnings available to common shareholders
Basic EPS
Common shares outstanding entire period
Weighted average common shares:
Issued during period
13
Repurchased and retired during period
(468
(317
Weighted average common shares outstanding during period
Earnings per common share from net earnings - basic
Diluted EPS
Weighted average common shares outstanding during period - basic
Dilutive effect of in-the-money equity awards
222
399
Weighted average common shares outstanding during period - diluted
Earnings per common share from net earnings - diluted
Equity awards for 2,782 and 1,906 shares of stock were not included in the computation of diluted EPS for the quarters ended July 2, 2011, and June 30, 2012, respectively, due to the fact that their effect would be anti-dilutive.
10
NOTE D — COMMON STOCK AND EARNINGS PER SHARE — CONTINUED
45
(273
(158
244
365
Equity awards for 2,782 and 1,934 shares of stock were not included in the computation of diluted EPS for the six months ended July 2, 2011, and June 30, 2012, respectively, due to the fact that their effect would be anti-dilutive.
11
NOTE E — SEGMENT INFORMATION
USANA operates in a single operating segment 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 has determined that the Company operates in one reportable business segment. Performance for a region or market is primarily evaluated based on sales. The Company does not use profitability reports on a regional or market basis for making business decisions. 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.
USANA® Nutritionals
78
%
79
USANA Foods
12
Sensé – beautiful science®
Selected financial information for the Company is presented for two geographic regions: North America/Europe and Asia Pacific, with three sub-regions under Asia Pacific. Individual markets are categorized into these regions as follows:
· North America/Europe — United States (including direct sales from the United States to the United Kingdom and the Netherlands), Canada, Mexico, France(1), and Belgium(1)
· Asia Pacific
· Southeast Asia/Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand(1)
· Greater China — Hong Kong, Taiwan, and China
· North Asia — Japan and South Korea
(1) The Company commenced operations in Thailand, France, and Belgium at the end of the first quarter of 2012.
NOTE E — SEGMENT INFORMATION — CONTINUED
Selected Financial Information
Financial information by geographic region is presented for the periods indicated below:
Net Sales to External Customers
North America/Europe
60,267
62,464
120,288
121,096
Asia Pacific
Southeast Asia/Pacific
27,225
34,271
51,919
66,523
Greater China
53,678
56,770
105,789
113,405
North Asia
7,755
7,396
14,495
13,997
Asia Pacific Total
88,658
98,437
172,203
193,925
Consolidated Total
The following table provides further information on markets representing ten percent or more of consolidated net sales and long-lived assets, respectively:
Hong Kong
41,785
43,547
81,988
87,354
United States
37,121
39,108
74,157
75,586
Canada
17,462
16,246
34,789
32,435
Long-lived Assets
China
59,806
58,673
46,991
46,490
Australia
15,280
15,142
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 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 31, 2011, 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 June 30, 2012, we had approximately 235,000 active Associates and approximately 66,000 active Preferred Customers worldwide. For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA 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:
· Greater China — Hong Kong, China, and Taiwan
(1) We commenced operations in Thailand, France and Belgium at the end of the first quarter of 2012.
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:
Product Line
Essentials
29
28
Optimizers
49
51
All Other
Key Product
USANA® Essentials
18
Proflavanol®
HealthPak 100 ™
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 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 up-to-date 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. We believe that the Lifetime Matching Bonus will be a more attractive incentive to our Associates and 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 some of 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 fluctuations, however, have the opposite effect on our Associate incentives and selling, general and administrative expenses. During the six months ended June 30, 2012, net sales outside of the United States represented approximately 76% 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 90% of product sales during the six months ended June 30, 2012. 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.
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
Change from
Percent
July 2, 2011
June 30, 2012
Prior Year
Change
83,000
37.4
82,000
34.9
(1,000
(1.2
)%
Asia Pacific:
43,000
19.4
58,000
24.7
15,000
87,000
39.2
37.0
0.0
9,000
4.0
8,000
3.4
(11.1
139,000
62.6
153,000
65.1
14,000
10.1
222,000
100.0
235,000
13,000
5.9
Active Preferred Customers By Region
53,000
77.9
52,000
78.8
(1.9
6,000
8.8
9.1
11.8
7,000
10.6
(12.5
1,000
1.5
22.1
21.2
(6.7
68,000
66,000
(2,000
(2.9
Current Focus and Recent Developments
We are currently focusing our efforts on: (i) growing our business in Greater China, (ii) the implementation of our strategy to stabilize and grow our North American markets, and (iii) international expansion.
Our development efforts in Greater China during the first six months of 2012 have included further educating our Associates on the USANA products that we introduced in China during 2011, and on our China compensation plan. Additionally, in the first quarter of 2012 we opened a new branch office in Shenzhen, which is a key city for our business in southern China.
In North America/Europe, we continued to execute our stabilization and growth strategy, which focuses on strengthening our partnership with Associates, introducing North America-specific incentives, and implementing our global marketing strategy. During the
first six months of 2012, we made progress on each component of this strategy. For example, we have held an increased number of meetings and events where members of our management team have worked closely with our Associate Leaders to grow our business. The most significant event occurred in April 2012, in Los Angeles, California, where members of our management team launched our new Lifetime Matching Bonus in front of a sold-out venue of North American Associates. The Lifetime Matching Bonus has been very well received by our Associates in all of our markets. Finally, we offered a promotion specifically for our Associates in Mexico for a portion of the first and second quarters of 2012. We believe that this promotion has also contributed to the momentum we are experiencing in Mexico and North America in general.
In terms of international expansion, we commenced operations in Thailand, France and Belgium at the end of the first quarter of 2012. In the second quarter of 2012, these markets contributed $1.2 million to net sales. Our initial experience with these markets is that they are heavily consumer focused. As such, we believe that it will take time for our existing Associate leaders in these markets to find and develop entrepreneurs to grow each respective market. Consequently, we believe that sales growth in each of these markets will occur at a slower rate than we initially anticipated.
Results of Operations
Summary of Financial Results
Net sales for the second quarter of 2012 increased 8.0%, to $160.9 million, compared with the second quarter of 2011. This net sales increase was driven by sales growth in each of our regions with the exception of North Asia, and also included the addition of Thailand, France, and Belgium. Currency fluctuation during the quarter reduced net sales by approximately $2.7 million.
As previously mentioned, during the quarter we launched our Lifetime Matching Bonus incentive. This new bonus was introduced to our Associates with a short-term promotion similar to promotions that we have offered with success in the past. We believe that this promotion contributed to our sales and Associate growth during the quarter. Specifically, we estimate that this promotion added approximately $4.6 million to net sales, the majority of which was recognized in our Greater China and Southeast Asia Pacific regions. Further, price increases in certain markets contributed an estimated $4.7 million to net sales during the quarter. These and other factors that contributed to our sales results during the second quarter of 2012 are discussed below under our regional results.
Net earnings for the second quarter of 2012 increased 20.9%, to $16.7 million, compared with the second quarter of 2011. This increase was primarily the result of higher net sales, improved gross margins, lower relative Associate incentives, and a lower effective tax rate.
Quarters Ended July 2, 2011 and June 30, 2012
Net Sales
The following table summarizes the changes in our net sales by geographic region for the quarters ended as of the dates indicated:
Net Sales by Region
Quarter Ended
from prior
year
change
40.5
38.8
2,197
3.6
18.3
21.3
7,046
25.9
36.0
35.3
3,092
5.8
5.2
4.6
(359
(4.6
59.5
61.2
9,779
11.0
11,976
8.0
17
North America/Europe: The increase in net sales in this region was primarily due to increased sales per Associate, which we believe was due mostly to the momentum generated by the introduction of our Lifetime Matching Bonus and the related short-term promotion that we offered. We estimate that this short-term promotion added $0.8 million to net sales in this region during the quarter. Net sales also benefited by $0.5 million from the inclusion of France and Belgium during the quarter. These improvements were partially offset by the effects of fluctuations in foreign currency exchange rates, which reduced net sales in this region by $1.7 million.
The number of active Associates in this region declined by 1.2% on a year-over-year basis, but increased 6.5% sequentially. Considering the historical customer declines we have experienced in this region for some time, we believe that both our sequential quarter and year-over-year results are meaningful improvements in this region. We believe that these improvements are primarily due to our new Lifetime Matching Bonus and the short-term promotion previously mentioned.
Asia Pacific: The increase in net sales in this region was driven by growth in Southeast Asia Pacific and Greater China, which was primarily the result of (i) an increase in the number of active Associates, (ii) price increases in certain markets, and (iii) the introduction of our Lifetime Matching Bonus program and the related short-term promotion. We estimate that price increases added $4.7 million to net sales in this region for the quarter and that the short-term promotion added $3.8 million. Net sales for the quarter also benefited by $0.7 million from the inclusion of Thailand. While we experienced sales growth this quarter in nearly all of our markets in this region, the most significant growth continues to be in the Philippines, where net sales increased 124.4% year-over-year. The improvements in net sales in this region during the second quarter of 2012 were partially offset by: (i) an estimated $4.0 million increase in sales ahead of certain strategic changes that were to be implemented in Hong Kong during the second quarter of 2011, and (ii) the effects of fluctuations in foreign currency exchange rates, which reduced net sales by $1.0 million during the second quarter of 2012.
The number of active Associates in this region increased by 10.1% compared to the prior year quarter. This increase was primarily the result of excitement generated by the introduction of our Lifetime Matching Bonus program and the related short-term promotion. Again, of the markets in this region, the Philippines generated the most significant Associate growth, where the number of active Associates increased 100.0% on a year-over-year basis.
Gross Profit
Gross profit margins improved modestly to 82.6% of net sales for the second quarter of 2012 from 82.4% for the second quarter of 2011. Overall, this improvement can be attributed to price increases that took place in several of our international markets toward the end of the first quarter of 2012, which we estimate improved gross profit margins by approximately 60 basis points. To a lesser extent, lower net freight costs on shipments to our customers and leverage gained on fixed costs from increasing net sales also contributed to improved gross margins. Improvements to gross margin during the second quarter of 2012 were partially offset by increases in raw material costs, which we estimate reduced gross profit margins by approximately 40 basis points, and, to a lesser extent, the impact of a strengthening in the U.S. dollar.
Associate Incentives
Associate incentives decreased to 44.1% of net sales during the second quarter of 2012, compared with 45.5% for the second quarter of 2011. This decrease can be attributed to price increases that took place toward the end of the first quarter. Payout under our Matching Bonus program benefited further from our continued efforts to efficiently manage this component of our Associate Compensation Plan.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased modestly to 22.9% of net sales for the second quarter of 2012, compared with 22.7% for the second quarter of 2011.
In absolute terms, our selling, general and administrative expenses increased $3.0 million for the second quarter of 2012, compared with the second quarter of 2011. The most significant components of this increase in absolute terms were as follows:
· An increase in equity compensation expense of approximately $1.1 million, which was due mostly to a low comparable in the prior year quarter resulting from the recapture of previously recognized expense on canceled equity awards;
· New market costs of approximately $1.1 million; and
· An increase in wage-related expenses of approximately $0.6 million.
Income Taxes
Our effective income tax rate during the second quarter of 2012 was 32.8%, compared with 34.5% in the second quarter of 2011. This decrease resulted primarily from a restructuring of USANA’s Hong Kong and Singapore operations implemented during the quarter, which included a one-time favorable adjustment to jurisdictional deferred tax assets and liabilities.
Diluted Earnings Per Share
Diluted earnings per share increased 26.1% during the current year quarter when compared with the second quarter of 2011. This increase was due to higher net earnings and a lower number of diluted shares outstanding, which was the result of share repurchases over the last twelve months.
The following table summarizes the changes in our net sales by geographic region for the periods ended as of the dates indicated:
41.1
38.4
808
0.7
17.7
21.1
14,604
28.1
36.2
7,616
7.2
5.0
4.5
(498
(3.4
58.9
61.6
21,722
12.6
22,530
7.7
North America/Europe: The increase in net sales in this region during the first six months of 2012 when compared with the same period in 2011 was primarily due to increased sales per Associate and momentum generated, in large part, by the introduction of our Lifetime Matching Bonus program and the related short-term promotion that we offered in the second quarter. Net sales during the first six months of 2012 also benefited by $0.5 million from the inclusion of France and Belgium. These improvements were partially offset by the effects of fluctuations in foreign currency exchange rates, which reduced net sales in this region by $2.4 million during the first six months of 2012 when compared with the same period in 2011.
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Asia Pacific: The increase in net sales in this region during the first six months of 2012 was driven by growth in Southeast Asia Pacific and Greater China, which was primarily the result of: (i) an increase in the average number of active Associates throughout the first six months of 2012, (ii) a surge in sales ahead of price increases that took place in certain of these markets, (iii) the impact of these price increases, and (iv) the introduction of our Lifetime Matching Bonus program and the related short-term promotion that we offered. We estimate that the surge in sales ahead of price increases added $11.0 million, that the price increases added $7.1 million, and that the short-term promotion added $3.8 million to net sales in this region during the first six months of 2012. Net sales also benefited by $0.8 million from the inclusion of Thailand in the current year. These increases were partially offset by certain events that contributed to sales in this region during the first six months of 2011 that did not occur in 2012, namely: (i) an estimated $4.0 million surge in sales ahead of certain strategic changes that were to be implemented in Hong Kong, and (ii) the recognition of approximately $3.0 million of deferred revenue during the first quarter of 2011.
Gross profit for the first six months of 2012 increased slightly to 82.4% of net sales compared with 82.3% in the prior year period, largely as a result of price increases in several of our international markets introduced toward the end of the first quarter of 2012. We also experienced benefits from leverage on increasing sales as well as an increasing percentage of sales from certain international markets where we have higher gross margins. Although currency fluctuation negatively impacted gross profit margins for the second quarter of 2012, we experienced an overall benefit to gross profit margins from currency fluctuation for the first six months of 2012. Improvements to gross margins during the first six months of 2012 were partially offset by increases in raw material costs.
Associate incentives decreased to 44.1% of net sales during the first six months of 2012, compared with 45.3% for the first six months of 2011. This decrease can be attributed to: (i) the temporary surge in sales we experienced during the first quarter of 2012 ahead of the price changes discussed above (when we experience a temporary surge or decline in sales our Associate incentives as a percent of net sales typically react in an inverse manner), and (ii) the impact of these price increases on the full second quarter of 2012. Payout under our Matching Bonus program benefited further from our continued efforts to efficiently manage this component of our Associate Compensation Plan.
Selling, general and administrative expenses decreased slightly to 23.7% of net sales for the first six months of 2012, compared with 23.8% for the same period in 2011. This slight change reflects leverage gained on increased sales outside the United States in markets where selling, general and administrative expenses are lower, partially offset by costs associated with opening our new markets and low initial sales in these markets.
In absolute terms, our selling, general and administrative expenses increased $5.1 million for the first six months of 2012, compared with the same period in 2011. The most significant components of this increase in absolute terms were as follows:
· New market costs of approximately $1.8 million; and
· An increase in equity compensation expense of approximately $0.8 million due mostly to a low comparable in the prior year period;
· An increase in wage-related expenses of approximately $0.8 million;
· An increase in credit card and bank fees that vary with sales of approximately $0.7 million; and
· An increase related to our corporate branding efforts of approximately $0.7 million.
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Our effective income tax rate during the first six months of 2012 was 33.6%, compared with 34.5% in the first six months of 2011. This decrease resulted primarily from a restructuring of USANA’s Hong Kong and Singapore operations implemented during the second quarter, which included a one-time favorable adjustment to jurisdictional deferred tax assets and liabilities.
Diluted earnings per share increased 27.2% during the first six months of 2012 when compared to the first six months of 2011. This increase was due to higher net earnings and a lower number of diluted shares outstanding, which was the result of share repurchases by the Company over the last twelve months.
Liquidity and Capital Resources
We have historically met our working capital and capital expenditure requirements by using both net cash flow from operations and by drawing on our line of credit. Our principal source of liquidity is our operating cash flow. There are currently no material restrictions on our ability to transfer and remit available funds among our international markets. Repatriation of funds that are related to earnings considered permanently reinvested in certain of our markets would not result in a tax liability that would have a material impact on our liquidity.
Operating cash flow
We typically generate positive cash flow due to our strong operating margins. During the first six months of 2012, we had a net cash flow from operating activities of $43.9 million, compared with $31.4 million in the same period of 2011. The most significant factors contributing to this increase include higher net earnings and benefits from changes in operating assets and liabilities.
Line of credit
We have a long-standing relationship with Bank of America. We currently maintain a $60.0 million credit facility pursuant to a credit agreement with Bank of America, which expires in April 2016. We did not draw on this line of credit at any time during the first six months of 2012, and, as of June 30, 2012 there was no outstanding balance on this line of credit.
The agreement for this credit facility contains restrictive covenants, which require us to maintain a consolidated rolling four-quarter adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) equal to or greater than $60.0 million, and a ratio of consolidated funded debt to adjusted EBITDA of 2.0 to 1.0 at the end of each quarter. The adjusted EBITDA under this agreement is modified for certain non-cash expenses. As of June 30, 2012, we were in compliance with these covenants. Management is not aware of any issues currently impacting Bank of America’s ability to honor their commitment to extend credit under this facility.
Additionally, from time to time we will enter into short-term foreign currency credit arrangements in our international markets for strategic purposes, primarily as a way to reduce our exposure to negative effects of changes in foreign currency exchange rates. As of June 30, 2012, we had a balance of $0.6 million outstanding for this purpose and have classified this under other current liabilities. This credit arrangement has a maturity date of July 31, 2012.
Working capital
Cash and cash equivalents increased to $65.5 million at June 30, 2012, from $50.4 million at December 31, 2011. Of the $65.5 million held at June 30, 2012, $44.1 million was held in the United States, and $21.4 million was held by international subsidiaries. Of the $50.4 million held at December 31, 2011, $34.8 million was held in the United States, and $15.6 million was held by international subsidiaries.
Net working capital increased to $56.8 million at June 30, 2012, from $46.4 million at December 31, 2011. This increase in net working capital was due mostly to net cash provided by operating activities, which was offset in large part by share repurchases discussed
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below and also by purchases of property and equipment. Some of the other items that partially offset the increase in net working capital included a decrease in inventories and an increase in other current liabilities. Property and equipment purchases during the first six months of 2012 included manufacturing and IT-related equipment as well as investments in infrastructure for our new markets. The increase in other current liabilities for the first six months of 2012 related mostly to increases in unearned revenue, accrued Associate incentives/promotions, and income taxes payable, which were partially offset by a decrease in accrued employee compensation.
Share repurchase
We have a share repurchase plan that has been ongoing since the fourth quarter of 2000. Our Board of Directors periodically approves additional dollar amounts for share repurchases under that plan. For example, during the second quarter of 2012, the Board authorized an additional $21.8 million for share repurchases under the plan. Share repurchases are made from time-to-time, in the open market, through block trades or otherwise, and are based on market conditions, the level of our cash balances, general business opportunities, and other factors. During the first six months of 2012, we repurchased and retired 0.7 million shares of common stock for a total of $26.6 million, at an average market price of $39.26 per share. As of June 30, 2012, the remaining approved repurchase amount under the plan was $23.4 million. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.
Summary
We believe that current cash balances, future cash provided by operations, and amounts available under our line of credit will be sufficient to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we experience an adverse operating environment or unusual capital expenditure requirements, additional financing may be required. No assurance can be given, however, that additional financing, if required, would be available or on favorable terms. We might also require or seek additional financing for the purpose of expanding into new markets, growing our existing markets, or for other reasons. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders.
Forward-Looking Statements and Certain Risks
The statements contained in this report that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others. Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund our future operations and capital spending needs. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in these forward-looking statements for the reasons that are detailed in our most recent Annual Report on Form 10-K. The fact that some of these risk factors may be the same or similar to those in our past SEC reports means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in our other SEC filings are part of doing business in the industry in which we operate and will likely be present in all periods reported. The fact that certain risks are common in the industry does not lessen their significance. The forward-looking statements contained in this report are made as of the date of this report, and we assume no obligation to update them or to update the reasons why our actual results could differ from those that we have projected. Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include:
· Our ability to attract and maintain a sufficient number of Associates;
· Our dependence upon a network marketing system to distribute our products and the activities of our independent Associates;
· The integration of BabyCare’s operations and expansion of our business in China through BabyCare;
· Unanticipated effects of changes to our Compensation Plan;
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· Our planned expansion into international markets, including delays in commencement of sales or product offerings in any new market, delays in compliance with local marketing or other regulatory requirements, or changes in target markets;
· General economic conditions, both domestically and internationally;
· Potential political events, natural disasters, or other events that may negatively affect economic conditions;
· Potential effects of adverse publicity regarding the Company, nutritional supplements, or the network marketing industry;
· Reliance on key management personnel;
· Extensive government regulation of the Company’s products, manufacturing, and network marketing system;
· Potential inability to sustain or manage growth, including the failure to continue to develop new products;
· An increase in the amount of Associate incentives;
· Our reliance on the use of information technology;
· The effects of competition from new and established network and direct selling organizations in our key markets;
· The adverse effect of the loss of a high-level sponsoring Associate, together with a group of leading Associates, in that person’s downline;
· The loss of product market share or Associates to competitors;
· Potential adverse effects of customs, duties, taxation, and transfer pricing regulations, including regulations governing distinctions between and Company responsibilities to employees and independent contractors;
· The fluctuation in the value of foreign currencies against the U.S. dollar;
· Our reliance on outside suppliers for raw materials and certain manufactured items;
· Shortages of raw materials that we use in certain of our products;
· Significant price increases of our key raw materials;
· Product liability claims and other risks that may arise with our manufacturing activity;
· Intellectual property risks;
· Liability claims that may arise with our “Athlete Guarantee” program;
· Continued compliance with debt covenants;
· Disruptions to shipping channels that are used to distribute our products to international warehouses;
· The introduction of new laws or changes to existing laws, both domestically and internationally; or
· The outcome of regulatory and litigation matters.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to information presented from that presented for the year ended December 31, 2011.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods that are specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure. In designing and evaluating these
disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) under the Exchange Act). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Repurchases
The following table presents information with respect to purchases of USANA common stock made by the Company during the three months ended June 30, 2012:
Issuer Purchases of Equity Securities
(amounts in thousands, except per share data)
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs *
Fiscal April
(Apr. 1, 2012 through May 5, 2012)
145
39.61
22,525
Fiscal May
(May 6, 2012 through Jun. 2, 2012)
394
38.75
29,003
Fiscal June
(Jun. 3, 2012 through Jun. 30, 2012)
138
40.34
23,437
677
39.26
* The Company’s share repurchase plan has been ongoing since the fourth quarter of 2000, with the Company’s Board of Directors periodically approving additional dollar amounts for share repurchases under the plan. The Company began the second quarter with $28,246 remaining under the plan. As announced in a publicly issued press release on May 9, 2012, the Board of Directors authorized an increase to the share repurchase plan of $21,754. There currently is no expiration date on the approved repurchase amount.
Item 6. EXHIBITS
Exhibit Number
Description
3.1
Amended and Restated Articles of Incorporation (Incorporated by reference to Report on Form 8-K, filed April 25, 2006)
3.2
Bylaws (Incorporated by reference to Report on Form 8-K, filed April 25, 2006)
4.1
Specimen Stock Certificate for Common Stock, no par value (Incorporated by reference to Registration Statement on Form 10, File No. 0-21116, effective April 16, 1993)
2002 USANA Health Sciences, Inc. Stock Option Plan (Incorporated by reference to Registration Statement on Form S-8, filed July 18, 2002)*
10.2
Form of employee or director non-statutory stock option agreement under the 2002 Stock Option Plan (Incorporated by reference to Report on Form 10-K, filed March 6, 2006)*
10.3
Form of employee incentive stock option agreement under the 2002 Stock Option Plan (Incorporated by reference to Report on Form 10-K, filed March 6, 2006)*
10.4
Credit Agreement, dated June 16, 2004, by and between Bank of America, N.A. and USANA Health Sciences, Inc. (Incorporated by reference to Report on Form 10-Q for the period ended July 3, 2004)
10.5
Amendment dated May 17, 2006 to Credit Agreement dated June 16, 2004 (Incorporated by reference to Report on Form 10-Q for the period ended September 30, 2006)
Amendment dated April 24, 2007 to Credit Agreement dated June 16, 2004 (Incorporated by reference to Report on Form 10-Q for the period ended March 31, 2007)
10.7
USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (Incorporated by reference to Report on Form 8-K, filed April 25, 2006)*
10.8
Form of Stock Option Agreement for award of non-statutory stock options to employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (Incorporated by reference to Report on Form 8-K, filed April 26, 2006)*
10.9
Form of Stock Option Agreement for award of non-statutory stock options to directors who are not employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (Incorporated by reference to Report on Form 8-K, filed April 26, 2006)*
10.10
Form of Incentive Stock Option Agreement for employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (Incorporated by reference to Report on Form 8-K, filed April 26, 2006)*
10.11
Form of Stock-Settled Stock Appreciation Rights Award Agreement for employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (Incorporated by reference to Report on Form 8-K, filed April 26, 2006)*
10.12
Form of Stock-Settled Stock Appreciation Rights Award Agreement for directors who are not employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (Incorporated by reference to Report on Form 8-K, filed April 26, 2006)*
10.13
Form of Deferred Stock Unit Award Agreement for grants of deferred stock units to directors who are not employees under the USANA Health Sciences, Inc. 2006 Equity Incentive Award Plan (Incorporated by reference to Report on Form 8-K, filed April 26, 2006)*
10.14
Form of Indemnification Agreement between the Company and its directors (Incorporated by reference to Report on Form 8-K, filed May 24, 2006)*
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10.15
Form of Indemnification Agreement between the Company and certain of its officers (Incorporated by reference to Report on Form 8-K, filed May 24, 2006)*
10.16
Share Purchase Agreement, dated as of August 16, 2010, among USANA Health Sciences, Inc., Petlane, Inc., Yaolan Ltd., and BabyCare Holdings Ltd. (Incorporated by Reference to Report on Form 8-K, filed August 16, 2010)
10.17
Amended and Restated Credit Agreement, dated as of April 27, 2011 (Incorporated by reference to Report on Form 8-K, filed April 28, 2011)
10.18
Form of Executive Confidentiality, Non-Disclosure and Non-Solicitation Agreement (Incorporated by reference to Quarterly Report on Form 10-Q for the period ended October 1, 2011, filed November 9, 2011)*
31.1
Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2
Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
* Denotes a management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 8, 2012
/s/ G. Douglas Hekking
G. Douglas Hekking
Chief Financial Officer (Principal Financial and Accounting Officer)