Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-21116
USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
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 November 1, 2013 was 13,872,365.
For the Quarterly Period Ended September 28, 2013
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1
Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Comprehensive Income — Quarter Ended
4
Condensed Consolidated Statements of Comprehensive Income — Nine Months Ended
5
Condensed Consolidated Statement of Stockholders’ Equity
6
Condensed Consolidated Statements of Cash Flows
7
Notes to Condensed Consolidated Financial Statements
8-13
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14-23
Item 3
Quantitative and Qualitative Disclosures About Market Risk
24
Item 4
Controls and Procedures
PART II. OTHER INFORMATION
Item 6
Exhibits
25-26
Signatures
27
2
Item 1. Financial Statements
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
As of
December 29,
September 28,
2012
2013
ASSETS
Current assets
Cash and cash equivalents
$
70,839
115,349
Inventories
36,481
45,671
Prepaid expenses and other current assets
25,225
35,105
Total current assets
132,545
196,125
Property and equipment, net
61,751
60,432
Goodwill
17,890
18,105
Intangible assets, net
42,085
42,078
Deferred tax assets
5,956
3,562
Other assets
7,128
11,031
267,355
331,333
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
7,040
8,061
Other current liabilities
63,804
74,474
Total current liabilities
70,844
82,535
Deferred tax liabilities
10,001
9,022
Other long-term liabilities
938
1,127
Stockholders’ equity
Common stock, $0.001 par value; Authorized — 50,000 shares, issued and outstanding 13,821 as of December 29, 2012 and 13,860 as of September 28, 2013
14
Additional paid-in capital
43,822
52,848
Retained earnings
134,800
179,741
Accumulated other comprehensive income
6,936
6,046
Total stockholders’ equity
185,572
238,649
The accompanying notes are an integral part of these statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
Quarters Ended
September 29,
Net sales
165,175
173,691
Cost of sales
30,343
31,491
Gross profit
134,832
142,200
Operating expenses:
Associate incentives
70,406
76,361
Selling, general and administrative
40,342
41,145
Total operating expenses
110,748
117,506
Earnings from operations
24,084
24,694
Other income (expense):
Interest income
64
119
Other, net
203
(43
)
Other income (expense), net
267
76
Earnings before income taxes
24,351
24,770
Income taxes
6,861
8,017
Net earnings
17,490
16,753
Earnings per common share
Basic
1.22
Diluted
1.18
1.16
Weighted average common shares outstanding
14,365
13,751
14,884
14,393
Comprehensive income:
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
1,312
1,371
Tax benefit (expense) related to foreign currency translation adjustment
(402
(552
Other comprehensive income (loss), net of tax
910
819
Comprehensive income
18,400
17,572
Nine Months Ended
480,196
531,909
85,633
93,657
394,563
438,252
209,316
224,017
115,150
126,527
324,466
350,544
70,097
87,708
173
278
(311
177
(33
70,274
87,675
22,288
28,933
47,986
58,742
3.27
4.31
3.19
4.16
14,673
13,636
15,064
14,132
1,156
(1,070
(334
180
822
(890
48,808
57,852
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Nine Months Ended September 28, 2013
(in thousands)
Accumulated
Additional
Other
Common Stock
Paid-in
Retained
Comprehensive
Shares
Value
Capital
Earnings
Income (Loss)
Total
Balance at December 29, 2012
13,821
Equity-based compensation expense
6,113
Common stock repurchased and retired
(414
(4,284
(13,801
(18,085
Common stock issued under equity award plans, including tax benefit of $6,769
453
7,223
Tax impact of canceled vested equity awards
(26
Balance at September 28, 2013
13,860
CONDENSED 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
6,608
6,870
(Gain) loss on sale of property and equipment
(106
(23
8,184
Excess tax benefits from equity-based payment arrangements
(2,779
(7,570
Common stock awarded to Associates
100
—
Deferred income taxes
2,255
1,196
Changes in operating assets and liabilities:
Inventories, net
4,462
(9,999
Prepaid expenses and other assets
(9,223
(9,153
(1,063
1,048
Other liabilities
7,199
17,369
Net cash provided by operating activities
63,623
64,593
Cash flows from investing activities
Increase in notes receivable
(3,363
Proceeds from sale of property and equipment
148
47
Purchases of property and equipment
(6,811
(6,306
Net cash used in investing activities
(6,663
(9,622
Cash flows from financing activities
Proceeds from equity awards exercised
309
454
2,779
7,570
Repurchase of common stock
(35,501
Borrowings on line of credit
1,842
Payments on line of credit
(599
Net cash used in financing activities
(31,170
(10,061
Effect of exchange rate changes on cash and cash equivalents
458
(400
Net increase in cash and cash equivalents
26,248
44,510
Cash and cash equivalents, beginning of period
50,353
Cash and cash equivalents, end of period
76,601
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
11
25,008
25,554
NOTES TO CONDENSED 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: Americas and Europe and Asia Pacific, which is further divided into three sub-regions; Southeast Asia Pacific, Greater China, and North Asia. Americas and Europe includes the United States, Canada, Mexico, Colombia, the United Kingdom, France, Belgium, and the Netherlands. Southeast Asia Pacific includes Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea. All significant intercompany accounts and transactions have been eliminated in this consolidation.
The condensed balance sheet as of December 29, 2012, derived from audited financial statements, and the unaudited interim consolidated financial information of the Company have been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Certain information and footnote disclosures that are normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting of normal recurring adjustments that are necessary to state fairly the Company’s financial position as of September 28, 2013 and results of operations for quarters and nine months ended September 29, 2012 and September 28, 2013. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2012. The results of operations for the quarters and nine months ended September 28, 2013, may not be indicative of the results that may be expected for the fiscal year 2013 ending December 28, 2013.
NOTE B — INTANGIBLE ASSETS
Goodwill and indefinite-lived intangible assets are tested annually for impairment, or more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate, and operating or cash flow losses related to such assets. Goodwill and indefinite lived intangible assets are not amortized. Definite lived intangibles are amortized over their related useful lives.
During the third quarter of 2013, the annual test for impairment was performed. The result of this test indicated that there was not an impairment of the value of goodwill or indefinite-lived intangible assets for any reporting unit.
NOTE C — CONTINGENCIES
The Company is involved in various lawsuits, claims, investigations and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, relationships with suppliers, distributors, relationships with competitors, employees and other matters. While complete assurance cannot be given to the outcome of these proceedings, management does not currently believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations.
On July 23, 2013, the Company disclosed that the Securities and Exchange Commission is conducting a formal investigation, which appears to involve possible issues regarding trading in the Company’s stock during late 2012 by certain of the Company’s directors, including the Chairman. The Company, as well as certain of its directors and executives, have received subpoenas from the SEC to produce documents related to this matter. The Company and its directors are cooperating with the SEC in this matter. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome against the Company in this matter is remote. As such, management believes that the ultimate outcome of the SEC investigation will not have a material impact on the Company’s financial position or results of operations.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D —LONG-TERM DEBT AND LINE OF CREDIT
The Company has a line of credit with Bank of America. Interest is computed at the bank’s Prime Rate or LIBOR, adjusted by features specified in the Credit Agreement. The collateral for this line of credit is the pledge of the capital stock of certain subsidiaries of the Company, set forth in a separate pledge agreement with the bank. On July 18, 2013, the Company entered into an amended credit agreement, which increased the amount that it may borrow under the credit facility to $75,000. The only other modification to the amended credit agreement was that any new or existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation. This resulted in a $3,400 reduction in the available borrowing limit in the third quarter of 2013 due to existing normal course of business guarantees in certain markets. The Credit Agreement contains restrictive covenants based on adjusted EBITDA and a debt coverage ratio.
There was no outstanding debt on this line of credit at December 29, 2012 or at September 28, 2013. The Company will be required to pay any balance on this line of credit in full at the time of maturity in April 2016 unless the line of credit is replaced or terms are renegotiated.
NOTE E — INVENTORIES
Inventories consist of the following:
Raw materials
9,228
12,142
Work in progress
7,703
7,771
Finished goods
19,550
25,758
NOTE F — COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of shares outstanding for each period. Shares that have been repurchased and retired during the periods specified below have been included in the calculation of the number of weighted-average shares that are outstanding for the calculation of basic earnings per share based on the time they were outstanding in any period. Diluted earnings per common share are based on shares that are outstanding (computed under basic EPS) and on potentially dilutive shares. Shares that are included in the diluted earnings per share calculations under the treasury stock method include equity awards that are in-the-money but have not yet been exercised.
9
NOTE F — COMMON STOCK AND EARNINGS PER SHARE — CONTINUED
The following is a reconciliation of the numerator and denominator used to calculate basic earnings per share and diluted earnings per share for the periods indicated:
Quarter Ended
Net earnings available to common shareholders
Basic EPS
Common shares outstanding entire period
14,940
Weighted average common shares:
Issued during period
229
344
Canceled during period
(804
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
519
642
Weighted average common shares outstanding during period - diluted
Earnings per common share from net earnings - diluted
Equity awards for 522 and 15 shares of stock were not included in the computation of diluted EPS for the quarters ended September 29, 2012, and September 28, 2013, respectively, due to the fact that their effect would be anti-dilutive.
10
107
154
(374
(339
391
496
Equity awards for 1,357 and 445 shares of stock were not included in the computation of diluted EPS for the nine months ended September 29, 2012, and September 28, 2013, respectively, due to the fact that their effect would be anti-dilutive.
The Company has a stock repurchase plan in place that has been authorized by the Board of Directors. During the first nine months of 2012, the Company repurchased and retired 877 shares of common stock for a total of $35,501, at an average market price of $40.48 per share. During the first nine months of 2013, the Company repurchased and retired 414 shares of common stock for a total investment of $18,085, at an average market price of $43.68 per share. The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis. As of September 28, 2013, the remaining approved repurchase amount under the stock repurchase plan was $13,622. There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.
NOTE G — SEGMENT INFORMATION
USANA operates as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a global network marketing system of independent distributors (“Associates”). As such, management aggregates its operating segments into one reportable segment as management believes that the Company’s segments exhibit similar long-term financial performance and have similar economic characteristics. Performance for a region or market is evaluated based on sales. No single Associate accounted for 10% or more of net sales for the periods presented. The table below summarizes the approximate percentage of total product revenue that has been contributed by the Company’s nutritional and personal care products for the periods indicated.
USANA® Nutritionals
80
%
79
USANA Foods
12
13
Sensé — beautiful science®
Selected financial information for the Company is presented for two geographic regions: Americas and Europe and Asia Pacific, with three sub-regions under Asia Pacific. Individual markets are categorized into these regions as follows:
· Americas and Europe — United States, Canada, Mexico, Colombia (1), the United Kingdom, France (2), Belgium (2), and the Netherlands.
· Asia Pacific —
· Southeast Asia Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand (2)
· Greater China — Hong Kong, Taiwan and China(3)
· North Asia — Japan and South Korea
(1) The Company commenced operations in Colombia at the beginning of the third quarter of 2013
(2) The Company commenced operations in Thailand, France, and Belgium at the end of the first quarter 2012.
(3) The Company’s business in China is that of BabyCare, its wholly-owned subsidiary.
NOTE G — SEGMENT INFORMATION - CONTINUED
Selected Financial Information
Financial information by geographic region is presented for the periods indicated below:
Net Sales to External Customers
Americas and Europe
62,490
66,294
183,586
197,215
Asia Pacific
Southeast Asia Pacific
35,709
40,230
102,232
113,014
Greater China
59,722
59,768
173,127
200,141
North Asia
7,254
7,399
21,251
21,539
Asia Pacific Total
102,685
107,397
296,610
334,694
Consolidated Total
The following table provides further information on markets representing ten percent or more of consolidated net sales and long-lived assets, respectively:
Net sales:
Hong Kong
44,944
21,554
132,298
109,089
United States
39,991
39,282
115,577
118,329
China
N/A
29,788
66,772
Long-lived Assets:
59,130
60,827
46,559
48,969
Australia
15,121
13,324
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of USANA’s financial condition and results of operations is presented in six
sections:
· Overview
· Customers
· Current Focus and Recent Developments
· Results of Operations
· Liquidity and Capital Resources
· Forward-Looking Statements and Certain Risks
This discussion and analysis should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the year ended December 29, 2012, and our other filings, including Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission (“SEC”) through the date of this report.
Overview
We develop and manufacture high-quality, science-based nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling. Our customer base is comprised of two types of customers: “Associates” and “Preferred Customers.” Associates are independent distributors of our products who also purchase our products for their personal use. Preferred Customers purchase our products strictly for their personal use and are not permitted to resell or to distribute the products. As of September 28, 2013, we had approximately 245,000 active Associates and approximately 71,000 active Preferred Customers worldwide. For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased from us at any time during the most recent three-month period, either for personal use or for resale.
We have ongoing operations in the following markets, which are grouped and presented as follows:
· Americas and Europe — United States, Canada, Mexico, Colombia(1), the United Kingdom, France(2), Belgium(2), and the Netherlands
· Asia Pacific
· Southeast Asia Pacific — Australia, New Zealand, Singapore, Malaysia, the Philippines, and Thailand(2)
· Greater China — Hong Kong, Taiwan, and China (3)
(1) We commenced operations in Colombia at the beginning of the third quarter of 2013.
(2) We commenced operations in Thailand, France, and Belgium at the end of the first quarter of 2012.
(3) Our business in China is that of BabyCare, our wholly-owned subsidiary.
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
28
Optimizers
51
53
All Other
Key Product
USANA® Essentials
18
Proflavanol®
Other top-selling products include our BiOmega-3™, HealthPak 100™, and CoQuinone® 30.
We believe that our ability to attract and retain Associates and Preferred Customers to sell and consume our products is positively influenced by a number of factors. Some of these factors include: the general public’s heightened awareness and understanding of the connection between diet and long-term health, the aging of the worldwide population as older people generally tend to consume more nutritional supplements, and the growing desire for a secondary source of income or small business ownership.
We believe that our high-quality products and our financially rewarding Associate Compensation Plan are the key components to attracting and retaining Associates. We strive to ensure that our products are formulated with the latest science in nutrition research and to keep our product lines relatively compact, which we believe simplifies the selling and buying process for our Associates and Preferred Customers. We also periodically make changes to our Compensation Plan in an effort to ensure that our plan is among the most rewarding in the industry, to encourage behavior that we believe leads to a more successful business for our Associates, and to ensure that our plan provides us with leverage to grow sales and earnings. For example, during the second quarter of 2012 we modified the Matching Bonus component of our Compensation Plan, changing it from a short-term incentive to a long-term incentive. We now refer to this bonus as our Lifetime Matching Bonus, which was fully phased in during the fourth quarter of 2012. Further, during the third quarter of 2013 we made several enhancements to our Compensation Plan, which are designed to simplify the plan and make it more rewarding for both new and established Associates. These enhancements are discussed further under the Recent Developments section. We believe that the changes we have made to our Compensation Plan over the last two years will help facilitate long-term growth for both our Associates and the Company.
To further support our Associates in building their businesses, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system. These meetings are designed to assist Associates in their business development and to provide a forum for interaction with our Associate leaders and members of our management team. We also provide low cost sales tools, including online sales, business management, and training tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates. Although we provide training and sales tools, we ultimately rely on our Associates to sell our products, attract new customers to purchase our products, and educate and train new Associates.
Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and earnings can be significantly affected by fluctuations in currency exchange rates. In general, net sales and gross profit are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar. Currency
15
fluctuations, however, have the opposite effect on our Associate incentives and selling, general and administrative expenses. During the nine months ended September 28, 2013, net sales outside of the United States represented approximately 78% 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 91% of product sales during the nine months ended September 28, 2013. 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
September 29, 2012
September 28, 2013
Prior Year
Change
79,000
32.6
82,000
33.5
3,000
3.8
Asia Pacific:
58,000
24.0
60,000
24.4
2,000
3.4
97,000
40.1
94,000
38.4
(3,000
(3.1
)%
8,000
3.3
9,000
3.7
1,000
12.5
163,000
67.4
66.5
0.0
242,000
100.0
245,000
1.2
Preferred Customers By Region
52,000
81.2
81.7
6,000
11.5
9.4
11.3
33.3
5,000
7.8
4.2
(2,000
(40.0
1.6
2.8
12,000
18.8
13,000
18.3
8.3
64,000
71,000
7,000
10.9
16
Current Focus and Recent Developments
Our primary objective, both on a short- and long-term basis, is to strengthen and grow our active customer counts throughout the world. To this end, we continue to execute our Personalization initiative and growth strategies in North America and Greater China, as well as introduce additional market-specific strategies in each of our regions.
We began the year with the implementation of a price reduction in several of our mature markets. This initiative was intended to make our products and business opportunity more equitable across all of our markets. As a follow-up to this pricing initiative, in the second quarter we implemented a worldwide policy, which focuses on cross-border purchasing by our customers. With the Internet allowing consumers to research and purchase products online, we have experienced cross-border purchasing by customers in various markets in an effort to get desired formulations, favorable pricing, and products that are not available in their home markets. We believe that it is in the best long-term interest of the Company, and our customers, to have customers focus on purchasing products that are approved and offered in their home market. As we anticipated, this policy negatively impacted our financial results by an estimated $5.9 million during the third quarter, with our Greater China region being impacted the most by these changes. While we believe that these policy changes will add pressure to our results in the short-term, we believe that they are essential to the long-term success of our Associates and the Company.
In August we held our 2013 Annual International Convention, where we announced and implemented several strategic changes to our business. These changes include (i) simplification of our pricing structure and Compensation Plan, (ii) a 10% price discount on products ordered through our monthly Auto Order program, (iii) a 10% reward from the amount of a customer’s initial product order credited on the subsequent two Auto Orders, and (iv) increased payout under our Compensation Plan. We increased the payout under our Compensation Plan in several ways, including: (i) paying higher compensation to newer Associates, (ii) increased compensation for Associates who grow their business through our Auto Order program, (iii) simplifying the commission qualification requirements under the plan, resulting in more Associates earning compensation with us, (iv) simplifying our rank advancement system to make it easier for Associates to advance in our business, and (v) adding new recognition benefits for Associate leaders. Although we anticipate that these changes will, in the short-term, create pressure on our operating results, we believe that they will be a catalyst to drive long-term growth in both customers and sales.
Finally, during the third quarter we continued our international expansion efforts by commencing operations in our newest market, Colombia. We believe that Colombia will be a solid contributor to our Americas region as well as an ideal entrance into South America.
Results of Operations
Summary of Financial Results
Net sales for the third quarter of 2013 increased 5.2%, or $8.5 million, compared with the third quarter of 2012. This increase in net sales for the quarter came from growth in both Southeast Asia Pacific and the Americas and Europe. In general, sales increases during the quarter were the combined result of a higher number of active Associates and Preferred Customers in several of our markets, and higher sales volume per Associate from an increased number of our Associate leaders who are actively selling our products and building sales organizations. Our newest market, Colombia, also contributed $1.4 million to net sales during the quarter. These improvements were partially offset by (i) the world-wide policy changes we implemented in the second quarter, which we estimate reduced net sales by $5.9 million, (ii) the 10% Auto Order discount discussed above, which reduced net sales by $3.1 million, (iii) currency fluctuations, which reduced net sales by $2.0 million, and (iv) price adjustments at our international convention and earlier this year, which reduced net sales by approximately $1.5 million.
Net earnings for the third quarter of 2013 decreased 4.2%, to $16.8 million, compared with the third quarter of 2012. This decrease was due primarily to higher Associate Incentives expense resulting from the enhancements that we made to our Compensation Plan in August, which included a one-time payment of approximately $4.5 million in connection with one of the changes, and a discount on all Auto Orders.
Going forward, we anticipate that (i) the 10% Auto Order discount will reduce net sales by approximately 4% in the short term, and (ii) Associate Incentives expense will approximate 43.5% of net sales.
17
Quarters Ended September 29, 2012 and September 28, 2013
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
37.8
38.2
3,804
6.1
21.6
23.2
4,521
12.7
36.2
34.4
46
0.1
4.4
145
2.0
62.2
61.8
4,712
4.6
8,516
5.2
Americas and Europe: The net sales increase in this region was due to sales growth in every market, other than the United States where sales were essentially flat, and the addition of our newest market, Colombia. Net sales for the region were reduced by $1.5 million from the Auto Order discount discussed earlier in this report. Net sales in Canada increased year-over-year despite the price decreases implemented earlier this year and a negative impact from changes in currency exchange rates. The increase in net sales in Canada was due primarily to a 4.5% increase in the number of active Associates, and a 7.7% increase in the number of Preferred Customers. Net sales in Mexico increased 23.1% due to a 16.7% increase in the number of active Associates and a 25% increase in the number of active Preferred Customers.
Asia Pacific: The net sales increase in this region was driven by growth in Southeast Asia Pacific and was reduced by $1.6 million from Auto Order discounts. Net sales growth in Southeast Asia Pacific was driven by 110.1% growth in Singapore and 17.8% growth in Malaysia. Sales were nearly flat in Australia/New Zealand despite an estimated $2.6 million reduction due to price decreases implemented earlier this year, and the negative impact from changes in currency exchange rates. These improvements were the result of increased sales volume per Associate, as well as a 13.3% increase in the number of active Associates in Australia/New Zealand and a 50.0% increase in Singapore. Further, the number of active Preferred Customers increased 25.0% in Australia/New Zealand, and 100% in Singapore. Our results in Singapore also benefited by approximately $2.9 million from sales of our global MyHealthPak product as sales of this customizable product throughout our Asia Pacific region are serviced through Singapore. Sales in the Philippines were essentially flat and were negatively impacted by the typhoon and political unrest that occurred in this market during the quarter.
Sales in Greater China were essentially flat and included a 260% increase in China, and a 29.6% increase in Taiwan, both of which were offset by a large decrease in Hong Kong. These changes were reflective of changes in the number of active Associates in each of these markets. We believe that the world-wide policy changes that we introduced in the second quarter negatively impacted our results primarily in Hong Kong. While we believe that these policy changes will add pressure to our results in the short-term, we believe they are essential to the long-term success of our Associates and the Company.
Gross Profit
Gross profit increased slightly to 81.9% of net sales for the third quarter of 2013 from 81.6% for the third quarter of 2012. This increase can primarily be attributed to production efficiencies related to higher production levels, favorable changes in product mix, and overall lower cost of raw materials. These benefits were partially offset by (i) the negative impact of changes in currency exchange rates, (ii) increased pressure on net sales related to price decreases at the beginning of the year and the Auto Order discount that was introduced in August, and (iii) higher freight costs.
Associate Incentives
Associate incentives increased 140 basis points to 44.0% of net sales for the third quarter of 2013 when compared with the third quarter of 2012. This increase was due to (i) the recent enhancements that we made to our Compensation Plan, which included a one-time payout of approximately $4.5 million due to a change in how we calculate Associate commissions, and (ii) the Auto Order discount. This increase was partially offset by a lower payout under our new Lifetime Matching Bonus program and decreased spending on contests and promotions. As previously mentioned, we expect Associate incentives expense to approximate 43.5% of net sales going forward.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales decreased 70 basis points due to leverage gained on higher net sales, a decrease in spending on our 2013 Annual International Convention compared with 2012 when we celebrated our 20th Anniversary, and improved credit card discount rates.
In absolute terms, our selling, general and administrative expense increased $0.8 million due higher overall spending to support growing sales and spending associated with the launch of our Colombia operations.
Income Taxes
Our effective income tax rate during the third quarter of 2013 was 32.4%, compared with 28.2% in the third quarter of 2012. This increase was due to a one-time tax benefit from a prior-year tax return true-up recognized in the third quarter of 2012.
Diluted Earnings Per Share
Diluted earnings per share decreased 1.7%, while net earnings decreased 4.2%. The impact of decreased net earnings on diluted earnings per share was partially offset by a lower number of diluted shares outstanding, which was the result of share repurchases over the last twelve months.
19
Nine Months Ended September 29, 2012 and September 28, 2013
The following table summarizes the changes in our net sales by geographic region for the periods ended as of the dates indicated:
37.1
13,629
7.4
21.3
21.2
10,782
10.5
36.1
37.6
27,014
15.6
4.1
288
1.4
62.9
38,084
12.8
51,713
10.8
Americas and Europe: The net sales increase in this region during the first nine months of 2013 included growth in most markets due to: (i) increased sales volume per Associate, (ii) growth in the average number of active Associates in Mexico where net sales increased $6.0 million, or 30.9%, and (iii) growth in the average number of active Preferred Customers. Net sales in Canada were nearly flat despite an estimated $4.6 million reduction due to price decreases implemented earlier this year.
Asia Pacific: The net sales increase in this region during the first nine months of 2013 was driven by growth in Greater China and Southeast Asia Pacific, which was primarily the result of an increase in the average number of active Associates in the first half of the year. The increase also included an estimated $7.0 million in incremental sales generated ahead of the worldwide policy changes that we implemented during the second quarter as previously discussed.
These improvements were partially offset by two events that contributed to sales during the first nine months of 2012 that did not occur in 2013, namely: (i) an estimated $11.0 million surge in sales ahead of price increases, and (ii) an estimated $4.0 million from the short-term promotion that we offered in connection with the introduction of our Lifetime Matching Bonus.
Gross profit for the first nine months of 2013 increased slightly to 82.4% of net sales compared with 82.2% in the prior year. This increase can be attributed to production efficiencies, partially offset by the negative impact of a change in sales mix by market and added pressure from price changes that have taken place during 2013.
Associate incentives expense decreased 150 basis points to 42.1% of net sales for the first nine months of 2013 when compared with the same period of the prior year. This decrease was due to lower payout under our new Lifetime Matching Bonus program and lower spending on contests and promotion, partially offset by increased spending from the enhancements we made to our Compensation Plan in August, which included a one-time payout of approximately $4.5 million.
20
Selling, general and administrative expenses as a percentage of net sales remained relatively flat in the first nine months of 2013 compared with the same period in 2012. In absolute terms, our selling, general and administrative expense increased $11.4 million. This increase is related to higher overall spending to support growing sales, with the largest increase coming from a $6.0 million increase in wages and benefits.
Our effective income tax rate was 33.0% for the first nine months of 2013, compared with 31.7% for the same period in 2012. This increase was due to a one-time tax benefit from a prior-year tax return true-up recognized in 2012.
Diluted earnings per share increased 30.4% during the first nine months of 2013 when compared with the same period in the prior year. 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. Although we are required to maintain cash deposits with banks in some of our markets, there are currently no material restrictions on our ability to transfer and remit available funds among our international markets. The repatriation of $7.7 million that relates to earnings considered indefinitely reinvested in certain of our markets would result in a tax liability to the Company.
Operating cash flow
We typically generate positive cash flow due to our strong operating margins. Net cash flow from operating activities totaled $64.6 million in the first nine months of 2013, compared with $63.6 million in the same period of the prior year. Items affecting year-over-year changes in cash flow from operating activities include: (i) higher net earnings, and (ii) changes in other liabilities during 2013, which resulted from an increase in accrued expenses due to higher sales and net earnings. These increases were partially offset by increased inventory levels, which can be attributed to stock levels necessary to support growing sales in certain markets, incorporating longer lead times into our operating processes, and inventories to support Colombia.
Line of credit
We have a long-standing relationship with Bank of America. For the last few years, we have maintained a $60.0 million credit facility pursuant to a credit agreement with Bank of America, which expires in April 2016. On July 18, 2013, we entered into an amended credit agreement, which increased the amount that we may borrow under the credit facility to $75.0 million. The only other modification to the amended credit agreement was that any new or existing bank guarantees are considered a reduction of the overall availability of credit and part of the covenant calculation. This resulted in a $3.4 million reduction in the available borrowing limit in the quarter due to existing normal course of business guarantees in certain markets. We did not otherwise draw on this line of credit at any time during the first nine months of 2013, and, as of September 28, 2013, there was no actual outstanding balance on our 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 no greater than 2.0 to 1.0, calculated on results at the end of each quarter. The adjusted EBITDA under this agreement is modified for certain non-cash expenses. As of September 28, 2013, 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.
21
Working capital
Cash and cash equivalents increased to $115.3 million at September 28, 2013, from $70.8 million at December 29, 2012. The net increase in cash and cash equivalents was due primarily to cash provided by operating activities, and was reduced by share repurchases as discussed below. Net working capital increased to $113.6 million at September 28, 2013, from $61.7 at December 29, 2012. This increase in net working capital was primarily generated by the increase in cash and cash equivalents, but was also affected by the increase in inventory discussed above, as well as increased prepaid expenses and other current assets. Partially offsetting these improvements was an increase in other current liabilities, which was due primarily to higher accruals associated with overall growth of the Company’s operations.
Of the $115.3 million cash and cash equivalents held at September 28, 2013, $63.8 million was held in the United States, and $51.5 million was held by international subsidiaries. Of the $70.8 million held at December 29, 2012, $38.6 million was held in the United States, and $32.2 million was held by international subsidiaries.
As previously reported, we had planned to invest as much as $25 million in capital expenditures during 2013, which is meaningfully higher than our typical annual capital investment. Planned investments in China and international development are the primary catalysts to expected capital spending in 2013. Due to delayed timing on certain of these investments, much of this additional investment will occur in 2014.
Share repurchase
We have a share repurchase plan that has been ongoing since the fourth quarter of 2000. The objective of this plan is to return value to our shareholders. Our Board of Directors has periodically approved additional dollar amounts 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 nine months of 2013, we repurchased and retired 414 thousand shares of common stock for a total investment of $18.1 million, at an average market price of $43.68 per share. As of September 28, 2013, the remaining approved repurchase amount under the plan was $13.6 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
22
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;
· 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.
23
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 29,2012.
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 September 28, 2013.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 28, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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)
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)
10.1
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)
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)
10.6
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)*
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)*
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)*
25
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)*
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)*
10.19
Separation and Release of Claims Agreement dated as of December 21, 2012 by and between USANA Health Sciences, Inc. and Roy Truett (incorporated by reference to Report on Form 8-K/A, filed December 26, 2012)*
10.20
Amendment to Confidentiality, Non-Disclosure and Non-Solicitation Agreement dated as of December 21, 2012 by and between USANA Health Sciences, Inc. and Roy Truett (incorporated by reference to Report on Form 8-K/A, filed December 26, 2012)*
10.21
Amendment to Amended and Restated Credit Agreement, dated as of July 18, 2013 (Incorporated by reference to Report on Form 8-K, filed July 23, 2013)
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.
26
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: November 7, 2013
/s/ Paul A. Jones
Paul A. Jones
Chief Financial Officer (Principal Financial and Accounting Officer)