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| USNA > SEC Filings for USNA > Form 10-Q on 10-Nov-2009 | All Recent SEC Filings |
10-Nov-2009
Quarterly Report
The following discussion and analysis of USANA's financial condition and results of operations 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 January 3, 2009, 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.
Our fiscal year end is the Saturday closest to December 31st of each year. Fiscal year 2009 will end on January 2, 2010 and is a 52-week year. Fiscal year 2008 ended on January 3, 2009 and was a 53-week year.
Overview
We develop and manufacture high-quality nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling. Our customer base comprises two types of customers; "Associates" and "Preferred Customers." Associates are independent distributors of our products who also purchase our products for their personal use. Preferred Customers purchase our products strictly for their personal use and are not permitted to resell or to distribute the products. As of October 3, 2009, we had approximately 199,000 active Associates and approximately 68,000 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:
† North America
† United States
† Canada
† Mexico
† Asia Pacific
† Southeast Asia/Pacific - Australia, New Zealand, Singapore, Malaysia, and the Philippines*
† East Asia - Hong Kong and Taiwan
† North Asia - Japan and South Korea
Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and earnings can be significantly affected by fluctuations in currency exchange rates. In general, our reported sales and earnings are affected positively by a weakening of the U.S. dollar and negatively by a strengthening of the U.S. dollar. 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.
Our primary product lines consist of USANA† Nutritionals and Sensé - beautiful science† (Sensé), which is our line of personal care products. The USANA Nutritionals product line is further categorized into three separate classifications: Essentials, Optimizers, and USANA Foods (formerly Macro Optimizers). The following tables summarize the approximate percentage of total product revenue that has been contributed by our major product lines and our top-selling products for the current and prior-year periods indicated:
Nine Months Ended
September 27, October 3,
Product Line 2008 2009
USANA® Nutritionals
Essentials 34 % 33 %
Optimizers 40 % 43 %
USANA Foods 13 % 12 %
Sensé - beautiful science® 10 % 9 %
All Other * 3 % 3 %
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Nine Months Ended
September 27, October 3,
Key Product 2008 2009
USANA® Essentials 20 % 19 %
HealthPak 100 ™ 12 % 12 %
Proflavanol® 10 % 11 %
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As a manufacturer of nutritional and personal care products utilizing direct
selling for the distribution of our products, we compete within two industries:
direct selling and nutrition. We believe that the most significant factors
affecting us are the aging of the worldwide population, the general public's
heightened awareness and understanding of the connection between diet and
health, and the growing desire for an alternative source of income, all of which
affect our ability to attract and retain Associates and Preferred Customers to
sell and consume our products.
Changes in product sales are typically the result of variations in product sales volumes relating to changes in the number of active Associates and Preferred Customers purchasing our products. Notably, Associate sales account for the majority of our product sales, representing 89% of product sales during the nine months ended October 3, 2009. Although to a lesser extent, changes in product sales may also periodically be affected by minor product price adjustments. In general, however, the volume of average monthly product purchases by our active Associates and Preferred Customers, in their local currencies, remains relatively constant over time. Accordingly, sales growth in local currencies is driven primarily by an increased number of active Associates and Preferred Customers. The number of active Associates and Preferred Customers is, therefore, used by management as a key non-financial measure.
We believe that our high-quality products and our financially rewarding Associate compensation plan ("Compensation Plan") are the key components to attracting and retaining Associates. To 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 the USANA management team. We also provide low cost sales tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates.
In addition to Company-sponsored meetings and sales tools, we maintain a website exclusively for our Associates where they can keep up-to-date on the latest USANA news, obtain training materials, manage their personal information, enroll new customers, shop, and register for Company-sponsored events. Additionally, through this website, Associates can access other online services to which they may subscribe. For example, we offer an online business management service, which includes a tool that helps Associates track and manage their business activity, a personal webpage to which their prospects or retail customers can be directed, e-cards for advertising, and a tax management tool.
The tables below summarize the changes in our active customer base by geographic region. These numbers have been rounded to the nearest thousand as of the dates indicated.
Active Associates By Region
As of As of Change from Percent
September 27, 2008 October 3, 2009 Prior Year Change
North America:
United States 61,000 33.2 % 61,000 30.7 % - 0.0 %
Canada 28,000 15.2 % 26,000 13.1 % (2,000 ) (7.1 )%
Mexico 14,000 7.6 % 15,000 7.5 % 1,000 7.1 %
North America Total 103,000 56.0 % 102,000 51.3 % (1,000 ) (1.0 )%
Asia Pacific:
Southeast Asia/Pacific 42,000 22.8 % 49,000 24.6 % 7,000 16.7 %
East Asia 32,000 17.4 % 40,000 20.1 % 8,000 25.0 %
North Asia 7,000 3.8 % 8,000 4.0 % 1,000 14.3 %
Asia Pacific Total 81,000 44.0 % 97,000 48.7 % 16,000 19.8 %
184,000 100.0 % 199,000 100.0 % 15,000 8.2 %
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Active Preferred Customers By Region
As of As of Change from Percent
September 27, 2008 October 3, 2009 Prior Year Change
North America:
United States 45,000 61.7 % 40,000 58.8 % (5,000 ) (11.1 )%
Canada 16,000 21.9 % 15,000 22.1 % (1,000 ) (6.3 )%
Mexico 3,000 4.1 % 3,000 4.4 % - 0.0 %
North America Total 64,000 87.7 % 58,000 85.3 % (6,000 ) (9.4 )%
Asia Pacific:
Southeast Asia/Pacific 8,000 10.9 % 8,000 11.7 % - 0.0 %
East Asia 1,000 1.4 % 1,000 1.5 % - 0.0 %
North Asia - 0.0 % 1,000 1.5 % 1,000 N/A
Asia Pacific Total 9,000 12.3 % 10,000 14.7 % 1,000 11.1 %
73,000 100.0 % 68,000 100.0 % (5,000 ) (6.8 )%
Total Active Customers By Region
As of As of Change from Percent
September 27, 2008 October 3, 2009 Prior Year Change
North America:
United States 106,000 41.3 % 101,000 37.8 % (5,000 ) (4.7 )%
Canada 44,000 17.1 % 41,000 15.4 % (3,000 ) (6.8 )%
Mexico 17,000 6.6 % 18,000 6.7 % 1,000 5.9 %
North America Total 167,000 65.0 % 160,000 59.9 % (7,000 ) (4.2 )%
Asia Pacific:
Southeast Asia/Pacific 50,000 19.5 % 57,000 21.3 % 7,000 14.0 %
East Asia 33,000 12.8 % 41,000 15.4 % 8,000 24.2 %
North Asia 7,000 2.7 % 9,000 3.4 % 2,000 28.6 %
Asia Pacific Total 90,000 35.0 % 107,000 40.1 % 17,000 18.9 %
257,000 100.0 % 267,000 100.0 % 10,000 3.9 %
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Our primary growth strategy includes continuing to attract and retain Associates through increased investment in Associate events, periodic new and enhanced product introductions, and the marketing of our Compensation Plan. This includes continued Associate education on our Compensation Plan and the two enhancements that were announced during the third quarter of 2008 - the matching bonus and the elite bonus. Additionally, we frequently evaluate opportunities for entering new markets and also may evaluate strategic acquisition opportunities.
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. 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;
† Activities of our independent Associates;
† Our planned expansion into international markets, including delays in commencement of sales in any new market, delays in compliance with local marketing or other regulatory requirements, or changes in target markets;
† Rigorous government scrutiny of network marketing practices;
† 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 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; and
† The outcome of regulatory and litigation matters.
Results of Operations
Summary of Financial Results and Recent Developments
Net sales for the third quarter of 2009 increased $3.6 million to $110.8 million, compared with $107.2 million in the third quarter of 2008. Net sales during the nine months ended October 3, 2009 increased $2.2 million to $320.2 million, compared with $318.0 million for the same period in 2008. The most significant items impacting net sales during the third quarter and nine months ended October 3, 2009 were changes in product sales volume driven by an 8.2% increase in the number of active Associates, a 6.8% decrease in the number of active Preferred Customers, and the negative effects of currency fluctuations (i.e. a significant strengthening of the U.S. dollar when compared to prior year exchange rates, particularly during the nine month period). Net sales were also impacted by the addition of operations in the Philippines in January, which added $1.9 million to net sales for the quarter and $5.2 million for the nine months ended October 3, 2009, and to a lesser extent, an increase in product prices in certain markets.
Net earnings during the third quarter of 2009 decreased 2.1% to $7.9 million from $8.1 million in the third quarter of 2008. Net earnings during the nine months ended October 3, 2009 decreased 8.3% to $23.3 million from $25.5 million during the same period of the prior year. These decreases were primarily due to higher Associate incentives expense relative to net sales and the negative effects of currency fluctuations. These changes were partially offset by lower selling, general and administrative expense on a quarter and year-to-date basis, and a lower effective tax rate on a year-to-date basis.
During the third quarter, we held our annual international convention in Salt Lake City where we introduced new products, re-launched three of our key products, and introduced new business enhancing sales tools. The products that we re-launched included important formula upgrades to our flagship products, Essentials and HealthPak. During the nine months ended October 3, 2009, these two products constituted approximately 31% of our global product sales. In conjunction with these product upgrades, we increased the price of Essentials and HealthPak by approximately 6% and 3%, respectively. Additionally, we introduced newly formulated super pills, which are exclusive to our fully customizable supplement system, MyHealthPak. As part of this event, we also introduced a new online training system for new Associates that we call eApprentice. This training system was developed to help new Associates have immediate access to network marketing training that is both simple to use and simple to understand.
Quarters Ended September 27, 2008 and October 3, 2009
Net Sales
The following table summarizes the changes in our net sales by geographic region
for the quarters ended as of the dates indicated:
Change
Net Sales by Region Approximate excluding
(in thousands) Change impact of the impact
Quarter Ended from prior Percent currency of currency
September 27, 2008 October 3, 2009 year change exchange exchange
North America:
United States $ 40,169 37.5 % $ 38,098 34.4 % $ (2,071 ) (5.2 )% N/A (5.2 )%
Canada 18,216 17.0 % 16,661 15.0 % (1,555 ) (8.5 )% (872 ) (3.8 )%
Mexico 6,208 5.8 % 5,535 5.0 % (673 ) (10.8 )% (1,605 ) 14.9 %
North America Total 64,593 60.3 % 60,294 54.4 % (4,299 ) (6.7 )% (2,477 ) (2.8 )%
Asia Pacific:
Southeast Asia/Pacific 23,265 21.7 % 25,227 22.8 % 1,962 8.4 % (1,312 ) 14.1 %
East Asia 15,206 14.2 % 20,262 18.3 % 5,056 33.3 % (195 ) 34.5 %
North Asia 4,112 3.8 % 4,981 4.5 % 869 21.1 % (83 ) 23.2 %
Asia Pacific Total 42,583 39.7 % 50,470 45.6 % 7,887 18.5 % (1,590 ) 22.3 %
$ 107,176 100.0 % $ 110,764 100.0 % $ 3,588 3.3 % $ (4,067 ) 7.1 %
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North America: The negative effect of currency fluctuations in the third quarter of 2009, when compared with the third quarter of 2008, played a significant role in the decline in net sales in North America, accounting for approximately $2.5 million of the decrease in net sales in this region. Further changes in net sales in this region were due to fluctuations in product sales related to an overall decrease in the number of active Associates and Preferred Customers.
Net sales in local currency for the United States and Canada, our largest individual markets, decreased 5.2% and 3.8%, respectively. In the United States the number of Associates purchasing our products remained the same in the third quarter of 2009 as in the third quarter of 2008, while the number of Preferred Customers decreased 11.1%. In Canada the number of Associates and Preferred Customers decreased 7.1% and 6.3%, respectively. In addition to an overall decrease in the number of active Associates and Preferred Customers in these markets, we have seen a slight decrease in the average product order volume from many of our new Associates in the United States, primarily on their initial purchase. We believe that the difficult economic conditions have contributed to these decreases. Sales in Mexico, however, increased 14.9% in local currency due primarily to a 7.1% increase in the number of active Associates.
Asia Pacific: The increase in net sales in Asia Pacific was due mainly to higher product sales resulting from a 19.8% increase in the number of active Associates in the third quarter of 2009, when compared with the third quarter of 2008, and to a lesser extent, an increase in product prices in certain markets. The increase in the number of active Associates in this region came from double-digit growth in Hong Kong, Malaysia, and South Korea, and the beginning of operations in the Philippines. Sales growth in this region, however, was negatively affected by currency fluctuations, which reduced net sales by approximately $1.6 million.
Gross Profit
Gross profit increased to 79.6% of net sales for the third quarter of 2009, from 79.3% of net sales for the third quarter in 2008. This increase in gross profit margin can be primarily attributed to lower relative freight costs on shipments to our customers and product price increases. This increase, however, was largely offset by the negative effect of currency fluctuations and increased costs of certain raw materials.
Associate Incentives
As a percentage of net sales, Associate incentives increased to 45.9% during the third quarter of 2009, compared with 41.6% for the third quarter of 2008. This increase was due to the Compensation Plan enhancements (the Matching Bonus and Elite Bonus) that were implemented at the end of the third quarter in 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to 22.9% of net sales for the third quarter of 2009, compared with 25.8% for the third quarter in 2008. In absolute terms, our selling, general and administrative expenses decreased by $2.2 million. The most significant components of this decrease in absolute terms were as follows:
† A decrease in legal expenses of approximately $1.3 million; and
† A decrease in promotional expenses of approximately $0.6 million.
The decrease in selling, general and administrative expense as a percentage of net sales can be attributed to the decreases listed above, coupled with relatively modest sales growth.
Other Income (Expense)
Other income (expense) changed from net other expense of $0.5 million in the third quarter of 2008 to net other income of $0.1 million in the third quarter of 2009. The largest component of this change was a slight gain relating to international currency exchange during the third quarter of 2009, compared with a $0.4 million loss during the third quarter of 2008. Also contributing to this change was a $0.2 million gain on the sale of an asset in the third quarter of 2009.
Diluted Earnings Per Share
Diluted earnings per share increased $0.01, or 2.0%, to $0.51 in the third quarter of 2009, compared with the third quarter of 2008. This increase was due to a lower number of average shares outstanding.
Nine Months Ended September 27, 2008 and October 3, 2009
Net Sales
The following table summarizes the changes in our net sales by geographic region
for the nine month periods ended as of the dates indicated:
Change
Net Sales by Region Approximate excluding
(in thousands) Change impact of the impact
Nine Months Ended from prior Percent currency of currency
September 27, 2008 October 3, 2009 year change exchange exchange
North America:
United States $ 118,844 37.4 % $ 114,495 35.8 % $ (4,349 ) (3.7 )% N/A (3.7 )%
Canada 56,326 17.7 % 48,051 15.0 % (8,275 ) (14.7 )% (6,928 ) (2.4 )%
Mexico 17,619 5.5 % 16,384 5.1 % (1,235 ) (7.0 )% (4,811 ) 20.3 %
North America Total 192,789 60.6 % 178,930 55.9 % (13,859 ) (7.2 )% (11,739 ) (1.1 )%
Asia Pacific:
Southeast Asia/Pacific 68,980 21.7 % 69,683 21.8 % 703 1.0 % (10,119 ) 15.7 %
East Asia 43,878 13.8 % 56,866 17.7 % 12,988 29.6 % (897 ) 31.6 %
North Asia 12,307 3.9 % 14,677 4.6 % 2,370 19.3 % (848 ) 26.1 %
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