UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) |
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended October 3, 2009 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
USANA HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Utah |
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87-0500306 |
(State or other jurisdiction |
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(I.R.S. Employer |
of incorporation or organization) |
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Identification No.) |
3838 West Parkway Blvd., Salt Lake City, Utah 84120
(Address of principal executive offices, Zip Code)
(801) 954-7100
(Registrants 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 |
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Accelerated filer x |
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Non-accelerated filer o |
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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 registrants common stock as of November 6, 2009 was 15,305,093.
USANA HEALTH SCIENCES, INC.
For the Quarterly Period Ended October 3, 2009
INDEX
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Page |
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PART I. FINANCIAL INFORMATION |
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Item 1 |
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Financial Statements (unaudited) |
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Consolidated Balance Sheets |
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3 |
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Consolidated Statements of Earnings Quarter Ended |
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4 |
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Consolidated Statements of Earnings Nine Months Ended |
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5 |
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Consolidated Statements of Stockholders Equity and Comprehensive Income |
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6 |
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Consolidated Statements of Cash Flows |
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7 |
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Notes to Consolidated Financial Statements |
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8-17 |
Item 2 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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17-27 |
Item 3 |
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Quantitative and Qualitative Disclosures About Market Risk |
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27-29 |
Item 4 |
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Controls and Procedures |
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29 |
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PART II. OTHER INFORMATION |
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Item 1 |
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Legal Proceedings |
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30 |
Item 2 |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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30 |
Item 6 |
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Exhibits |
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31-32 |
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Signatures |
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33 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
(U.S. dollars in thousands)
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As of |
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As of |
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January 3, |
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October 3, |
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2009 (1) |
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2009 |
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(unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
13,281 |
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$ |
13,265 |
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Inventories |
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23,879 |
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25,615 |
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Prepaid expenses and other current assets |
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12,657 |
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8,932 |
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Deferred income taxes |
|
2,857 |
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2,533 |
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Total current assets |
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52,674 |
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50,345 |
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||
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Property and equipment, net |
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56,762 |
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57,289 |
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Assets held for sale |
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607 |
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Goodwill |
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5,690 |
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5,690 |
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Other assets |
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6,839 |
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8,150 |
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$ |
122,572 |
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$ |
121,474 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
6,879 |
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$ |
5,628 |
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Other current liabilities |
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47,655 |
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34,259 |
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Total current liabilities |
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54,534 |
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39,887 |
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Line of credit |
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34,990 |
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17,000 |
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Other long-term liabilities |
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1,212 |
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1,743 |
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Stockholders equity |
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Common stock, $0.001 par value; Authorized 50,000 shares, issued and outstanding 15,350 as of January 3, 2009 and 15,326 as of October 3, 2009 |
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15 |
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15 |
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Additional paid-in capital |
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8,089 |
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14,813 |
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Retained earnings |
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24,107 |
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46,683 |
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Accumulated other comprehensive income (loss) |
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(375 |
) |
1,333 |
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Total stockholders equity |
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31,836 |
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62,844 |
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$ |
122,572 |
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$ |
121,474 |
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(1) Derived from audited financial statements.
The accompanying notes are an integral part of these statements.
3
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(U.S. dollars in thousands, except per share data)
(unaudited)
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Quarter Ended |
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||||
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September 27, |
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October 3, |
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2008 |
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2009 |
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(as restated) |
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Net sales |
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$ |
107,176 |
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$ |
110,764 |
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Cost of sales |
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22,228 |
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22,637 |
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Gross profit |
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84,948 |
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88,127 |
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Operating expenses: |
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Associate incentives |
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44,573 |
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50,799 |
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Selling, general and administrative |
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27,621 |
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25,414 |
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Total operating expenses |
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72,194 |
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76,213 |
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Earnings from operations |
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12,754 |
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11,914 |
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Other income (expense): |
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Interest income |
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5 |
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15 |
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Interest expense |
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(84 |
) |
(105 |
) |
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Other, net |
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(410 |
) |
200 |
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||
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Other income (expense), net |
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(489 |
) |
110 |
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Earnings before income taxes |
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12,265 |
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12,024 |
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Income taxes |
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4,185 |
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4,112 |
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Net earnings |
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8,080 |
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7,912 |
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Earnings per common share |
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Basic |
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$ |
0.50 |
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$ |
0.52 |
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Diluted |
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$ |
0.50 |
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$ |
0.51 |
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Weighted average common shares outstanding |
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Basic |
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16,031 |
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15,345 |
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Diluted |
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16,133 |
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15,547 |
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The accompanying notes are an integral part of these statements.
4
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(U.S. dollars in thousands, except per share data)
(unaudited)
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Nine Months Ended |
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September 27, |
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October 3, |
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2008 |
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2009 |
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(as restated) |
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Net sales |
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$ |
317,954 |
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$ |
320,156 |
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Cost of sales |
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65,614 |
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66,236 |
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Gross profit |
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252,340 |
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253,920 |
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Operating expenses: |
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Associate incentives |
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131,540 |
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143,010 |
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Selling, general and administrative |
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80,410 |
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75,463 |
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Total operating expenses |
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211,950 |
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218,473 |
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||
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Earnings from operations |
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40,390 |
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35,447 |
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||
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Other income (expense): |
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Interest income |
|
188 |
|
45 |
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||
Interest expense |
|
(446 |
) |
(540 |
) |
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Other, net |
|
(367 |
) |
640 |
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||
|
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Other income (expense), net |
|
(625 |
) |
145 |
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Earnings before income taxes |
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39,765 |
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35,592 |
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||
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Income taxes |
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14,310 |
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12,243 |
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||
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Net earnings |
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25,455 |
|
23,349 |
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Earnings per common share |
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Basic |
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$ |
1.57 |
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$ |
1.52 |
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Diluted |
|
$ |
1.56 |
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$ |
1.51 |
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|
|
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Weighted average common shares outstanding |
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|
|
|
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Basic |
|
16,262 |
|
15,349 |
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Diluted |
|
16,351 |
|
15,421 |
|
The accompanying notes are an integral part of these statements.
5
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
Nine Months Ended September 27, 2008 and October 3, 2009
(U.S. dollars in thousands)
(unaudited)
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Shares |
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Value |
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Capital |
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Earnings |
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Income (Loss) |
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Total |
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For the Nine Months Ended September 27, 2008 |
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Balance at December 29, 2007 (as restated) |
|
16,198 |
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$ |
16 |
|
$ |
5,636 |
|
$ |
26,308 |
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$ |
989 |
|
$ |
32,949 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
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|
|||||
Net earnings |
|
|
|
|
|
|
|
25,455 |
|
|
|
25,455 |
|
|||||
|
|
|
|
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|
|
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|||||
Foreign currency translation adjustment, net of tax expense of $ 582 |
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|
|
|
|
|
|
(581 |
) |
(581 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
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|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
24,874 |
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|||||
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|
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Common stock repurchased and retired |
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(809 |
) |
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|
(5,134 |
) |
(22,931 |
) |
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(28,065 |
) |
|||||
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|
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|
|
|
|
|
|
|
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|
|||||
Equity-based compensation expense |
|
|
|
|
|
4,934 |
|
|
|
|
|
4,934 |
|
|||||
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|
|
|
|
|
|
|
|
|
|
|
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|
|||||
Common stock issued under equity award plans, including tax benefit of $2,095 |
|
258 |
|
|
|
2,637 |
|
|
|
|
|
2,637 |
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|||||
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|
|
|
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|
|
|
|
|
|
|
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|
|||||
Balance at September 27, 2008 (as restated) |
|
15,647 |
|
$ |
16 |
|
$ |
8,073 |
|
$ |
28,832 |
|
$ |
408 |
|
$ |
37,329 |
|
|
|
|
|
|
|
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|
|
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|||||
For the Nine Months Ended October 3, 2009 |
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|
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Balance at January 3, 2009 |
|
15,350 |
|
15 |
|
8,089 |
|
24,107 |
|
(375 |
) |
31,836 |
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|||||
|
|
|
|
|
|
|
|
|
|
|
|
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|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net earnings |
|
|
|
|
|
|
|
23,349 |
|
|
|
23,349 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Foreign currency translation adjustment, net of tax benefit of $1,427 |
|
|
|
|
|
|
|
|
|
1,708 |
|
1,708 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
25,057 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
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|
|||||
Common stock repurchased and retired |
|
(33 |
) |
|
|
(249 |
) |
(773 |
) |
|
|
(1,022 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity-based compensation expense |
|
|
|
|
|
6,916 |
|
|
|
|
|
6,916 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Common stock issued under equity award plans, including tax expense of $19 |
|
9 |
|
|
|
57 |
|
|
|
|
|
57 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance at October 3, 2009 |
|
15,326 |
|
$ |
15 |
|
$ |
14,813 |
|
$ |
46,683 |
|
$ |
1,333 |
|
$ |
62,844 |
|
The accompanying notes are an integral part of these statements.
6
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(unaudited)
|
|
Nine Months Ended |
|
||||
|
|
September 27, |
|
October 3, |
|
||
|
|
2008 |
|
2009 |
|
||
|
|
(as restated) |
|
|
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net earnings |
|
$ |
25,455 |
|
$ |
23,349 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities |
|
|
|
|
|
||
Depreciation and amortization |
|
4,894 |
|
5,312 |
|
||
Gain on sale of property and equipment |
|
(81 |
) |
(155 |
) |
||
Equity-based compensation expense |
|
4,934 |
|
6,916 |
|
||
Excess tax benefit from equity-based payment arrangements |
|
(2,225 |
) |
(11 |
) |
||
Deferred income taxes |
|
(1,603 |
) |
(2,179 |
) |
||
Provision for inventory valuation |
|
700 |
|
780 |
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Inventories |
|
(3,746 |
) |
(1,364 |
) |
||
Prepaid expenses and other assets |
|
152 |
|
3,776 |
|
||
Accounts payable |
|
3,015 |
|
(1,311 |
) |
||
Other liabilities |
|
6,625 |
|
(14,585 |
) |
||
|
|
|
|
|
|
||
Total adjustments |
|
12,665 |
|
(2,821 |
) |
||
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
38,120 |
|
20,528 |
|
||
|
|
|
|
|
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Receipts on notes receivable |
|
$ |
561 |
|
$ |
169 |
|
Increase in notes receivable |
|
4 |
|
(143 |
) |
||
Proceeds from sale of property and equipment |
|
136 |
|
837 |
|
||
Purchases of property and equipment |
|
(15,081 |
) |
(2,871 |
) |
||
|
|
|
|
|
|
||
Net cash used in investing activities |
|
(14,380 |
) |
(2,008 |
) |
||
|
|
|
|
|
|
||
Cash flows from financing activities |
|
|
|
|
|
||
Proceeds from equity awards exercised |
|
$ |
542 |
|
$ |
76 |
|
Excess tax benefits from equity-based payment arrangements |
|
2,225 |
|
11 |
|
||
Repurchase of common stock |
|
(28,065 |
) |
(1,022 |
) |
||
Borrowings on line of credit |
|
46,555 |
|
55,710 |
|
||
Payments on line of credit |
|
(43,905 |
) |
(73,700 |
) |
||
|
|
|
|
|
|
||
Net cash used in financing activities |
|
(22,648 |
) |
(18,925 |
) |
||
|
|
|
|
|
|
||
Effect of exchange rate changes on cash and cash equivalents |
|
(258 |
) |
389 |
|
||
|
|
|
|
|
|
||
Net increase (decrease) in cash and cash equivalents |
|
834 |
|
(16 |
) |
||
|
|
|
|
|
|
||
Cash and cash equivalents, beginning of period |
|
12,865 |
|
13,281 |
|
||
|
|
|
|
|
|
||
Cash and cash equivalents, end of period |
|
$ |
13,699 |
|
$ |
13,265 |
|
|
|
|
|
|
|
||
Supplemental disclosures of cash flow information |
|
|
|
|
|
||
|
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Interest, net of amount capitalized |
|
$ |
315 |
|
$ |
503 |
|
Income taxes |
|
16,222 |
|
17,874 |
|
The accompanying notes are an integral part of these statements.
7
USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except per share data)
(unaudited)
Basis of Presentation
The condensed balance sheet as of January 3, 2009, derived from audited financial statements, and the unaudited interim consolidated financial information of USANA Health Sciences, Inc. and its subsidiaries (collectively, the Company or USANA) 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 Companys financial position as of October 3, 2009, and results of operations for the quarters and nine months ended September 27, 2008 and October 3, 2009. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto that are included in the Companys Annual Report on Form 10-K for the year ended January 3, 2009. The results of operations for the quarter and nine months ended October 3, 2009, may not be indicative of the results that may be expected for the fiscal year 2009 ending January 2, 2010.
Recently Adopted Accounting Pronouncements
In June 2009, the FASB issued new codification standards which establish the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative GAAP for SEC registrants. The codification supersedes all non-SEC accounting and reporting standards which existed prior to the codification. All other non-grandfathered, non-SEC accounting literature not included in the codification is non-authoritative. The new codification standards are effective for interim and annual financial periods ending after September 15, 2009. As such, the Company adopted the codification standards during the quarter ended October 3, 2009. The adoption had no impact on the Companys consolidated financial statements. All prior references to previous GAAP in the Companys consolidated financial statements were updated with new references under the Codification.
Restatement of consolidated financial statements
In its Annual Report on Form 10-K filed with the SEC on March 6, 2009, the Company restated its historical consolidated financial statements for the fiscal years ended December 29, 2007 and December 30, 2006 to correct two errors related to income taxes payable during the reported periods, as explained below.
During 2008, the Internal Revenue Service (IRS) commenced an audit of the Companys tax returns for tax years 2003 through 2007. In January 2009, the IRS communicated its intent to disallow deductions claimed by the Company under Section 162(m) of the Internal Revenue Code (IRC). In February 2009, the Company settled the Section 162(m) matter with the IRS. Under the settlement, the cumulative tax impact to the Company is the loss of $11.8 million in tax deductions, resulting in estimated taxes due of $4.4 million, plus $0.8 million in interest. The $4.4 million in taxes due resulted in an increase to current liabilities and corresponding reduction in stockholders equity in the affected periods. The $0.8 million in interest resulted in an increase to current liabilities with a corresponding increase to income tax expense in the affected periods.
The IRS also disallowed the treatment of certain stock options granted by the Company as Incentive Stock Options. The Companys February 2009 settlement with the IRS also settled this matter. The settlement resulted in a cumulative increase of $1.3 million to compensation expense recorded in selling, general and administrative expense for the affected periods.
The Company concluded that the cumulative effect of the balance sheet adjustments due to these two errors was material to its fiscal year 2007, as well as its 2007 and 2008 quarterly balance sheets. The consolidated financial statements and related
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except per share data)
(unaudited)
disclosures for the quarter and nine months ended September 27, 2008 have been restated in this report to reflect the correction of the errors discussed above. The earnings impact of this restatement on the third quarter of 2008 was an increase to income taxes of $59, a decrease in basic earnings per share of $0.01, and no impact on diluted earnings per share. The earnings impact of this restatement on the nine months ended September 27, 2008 was an increase in selling, general and administrative expense of $289, an increase to income taxes of $90, and a decrease in both basic and diluted earnings per share of $0.02. The impact of this restatement on the balance sheet as of September 27, 2008 was an increase in other current liabilities of $6,068, a decrease in additional paid-in capital of $1,539, and a decrease in retained earnings of $4,529.
Refer to Note A of the 2008 Form 10-K for the effects of the restatement on the Companys consolidated financial statements as of and for the fiscal years ended December 29, 2007 and January 3, 2009.
NOTE A ORGANIZATION
USANA develops and manufactures high-quality nutritional and personal care products that are sold internationally through a network marketing system, which is a form of direct selling. The Companys products are sold throughout the United States (including direct sales from the United States to the United Kingdom and the Netherlands), Canada, Mexico, Australia, New Zealand, Singapore, Malaysia, the Philippines, Hong Kong, Taiwan, Japan, and South Korea.
NOTE B INVENTORIES
Inventories consist of the following:
|
|
January 3, |
|
October 3, |
|
||
|
|
2009 |
|
2009 |
|
||
|
|
|
|
|
|
||
Raw materials |
|
$ |
7,063 |
|
$ |
6,378 |
|
Work in progress |
|
5,412 |
|
4,821 |
|
||
Finished goods |
|
11,404 |
|
14,416 |
|
||
|
|
$ |
23,879 |
|
$ |
25,615 |
|
NOTE C PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
|
|
January 3, |
|
October 3, |
|
||
|
|
2009 |
|
2009 |
|
||
|
|
|
|
|
|
||
Prepaid insurance |
|
$ |
1,393 |
|
$ |
349 |
|
Other prepaid expenses |
|
1,458 |
|
1,576 |
|
||
Federal income taxes receivable |
|
3,759 |
|
1,189 |
|
||
Miscellaneous receivables, net |
|
3,182 |
|
2,572 |
|
||
Deferred commissions |
|
2,174 |
|
2,471 |
|
||
Other current assets |
|
691 |
|
775 |
|
||
|
|
$ |
12,657 |
|
$ |
8,932 |
|
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except per share data)
(unaudited)
Cost of property and equipment and their estimated useful lives is as follows:
|
|
|
|
January 3, |
|
October 3, |
|
||
|
|
Years |
|
2009 |
|
2009 |
|
||
Buildings |
|
40 |
|
$ |
35,714 |
|
$ |
37,017 |
|
Laboratory and production equipment |
|
5-7 |
|
14,414 |
|
15,201 |
|
||
Sound and video library |
|
5 |
|
600 |
|
600 |
|
||
Computer equipment and software |
|
3-5 |
|
24,626 |
|
27,352 |
|
||
Furniture and fixtures |
|
3-5 |
|
4,474 |
|
4,554 |
|
||
Automobiles |
|
3-5 |
|
201 |
|
256 |
|
||
Leasehold improvements |
|
3-5 |
|
3,871 |
|
4,428 |
|
||
Land improvements |
|
15 |
|
1,979 |
|
2,018 |
|
||
|
|
|
|
85,879 |
|
91,426 |
|
||
Less accumulated depreciation and amortization |
|
|
|
36,796 |
|
41,882 |
|
||
|
|
|
|
49,083 |
|
49,544 |
|
||
Land |
|
|
|
6,224 |
|
7,149 |
|
||
Deposits and projects in process |
|
|
|
1,455 |
|
596 |
|
||
|
|
|
|
$ |
56,762 |
|
$ |
57,289 |
|
Other current liabilities consist of the following:
|
|
|
|
January 3, |
|
October 3, |
|
||
|
|
|
|
2009 |
|
2009 |
|
||
Associate incentives |
|
|
|
$ |
6,498 |
|
$ |
7,901 |
|
Accrued employee compensation |
|
|
|
11,212 |
|
8,537 |
|
||
Income taxes |
|
|
|
6,243 |
|
207 |
|
||
Sales taxes |
|
|
|
3,923 |
|
3,553 |
|
||
Associate promotions |
|
|
|
607 |
|
797 |
|
||
Deferred revenue |
|
|
|
6,588 |
|
7,006 |
|
||
Provision for returns and allowances |
|
|
|
1,101 |
|
1,077 |
|
||
Arbitration award |
|
|
|
7,020 |
|
|
|
||
All other |
|
|
|
4,463 |
|
5,181 |
|
||
|
|
|
|
$ |
47,655 |
|
$ |
34,259 |
|
NOTE F LONG TERM DEBT AND LINE OF CREDIT
The Company has a $40,000 line of credit. At October 3, 2009, there was an outstanding balance of $17,000 associated with the line of credit, with a weighted-average interest rate of 1.25%. The interest rate is computed at the banks 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, as set forth in a separate pledge agreement with the bank. The Credit Agreement contains restrictive covenants based on a minimum EBITDA requirement and a debt coverage ratio. The Company will be required to pay the balance on this line of credit in full at the time of maturity in May 2011.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except per share data)
(unaudited)
NOTE G EQUITY-BASED COMPENSATION
Equity-based compensation expense relating to equity awards under the current and previous plans of the Company, together with the related tax benefit recognized in earnings for the periods ended as of the dates indicated is as follows:
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 27, |
|
October 3, |
|
September 27, |
|
October 3, |
|
||||
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
||||
Cost of sales |
|
$ |
205 |
|
$ |
189 |
|
$ |
536 |
|
$ |
532 |
|
Selling, general and administrative |
|
1,871 |
|
2,109 |
|
4,398 |
|
6,384 |
|
||||
|
|
2,076 |
|
2,298 |
|
4,934 |
|
6,916 |
|
||||
Related tax benefit |
|
748 |
|
845 |
|
1,796 |
|
2,492 |
|
||||
Net equity-based compensation expense |
|
$ |
1,328 |
|
$ |
1,453 |
|
$ |
3,138 |
|
$ |
4,424 |
|
The following table shows the remaining unrecognized compensation expense on a pre-tax basis for all types of equity awards that were outstanding as of October 3, 2009. This table does not include an estimate for future grants that may be issued.
Remainder of 2009 |
|
$ |
1,998 |
|
2010 |
|
8,154 |
|
|
2011 |
|
6,737 |
|
|
2012 |
|
5,367 |
|
|
2013 |
|
2,656 |
|
|
2014 |
|
64 |
|
|
|
|
$ |
24,976 |
|
The cost above is expected to be recognized over a weighted-average period of 2.1 years.
The following table includes weighted-average assumptions that the Company has used to calculate the fair value of equity awards that were granted during the periods indicated. Deferred stock units are full-value shares at the date of grant and have been excluded from the table below:
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 27, |
|
October 3, |
|
September 27, |
|
October 3, |
|
||||
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
||||
Expected volatility |
|
37.3 |
% |
55.8 |
% |
37.3 |
% |
41.0 |
% |
||||
Risk-free interest rate |
|
3.2 |
% |
2.1 |
% |
3.2 |
% |
1.8 |
% |
||||
Expected life |
|
4.0 yrs. |
|
4.1 yrs. |
|
4.0 yrs. |
|
4.0 yrs. |
|
||||
Expected dividend yield |
|
|
|
|
|
|
|
|
|
||||
Weighted-average grant price |
|
$ |
26.06 |
|
$ |
27.99 |
|
$ |
26.06 |
|
$ |
26.43 |
|
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except per share data)
(unaudited)
NOTE G EQUITY-BASED COMPENSATION CONTINUED
A summary of the Companys stock option and stock-settled stock appreciation right activity for the nine months ended October 3, 2009 is as follows:
|
|
|
|
Weighted- |
|
Weighted-average |
|
Aggregate |
|
||
|
|
|
|
average grant |
|
remaining |
|
intrinsic |
|
||
|
|
Shares |
|
price |
|
contractual term |
|
value* |
|
||
Outstanding at January 3, 2009 |
|
4,244 |
|
$ |
30.28 |
|
4.7 |
|
$ |
21,382 |
|
Granted |
|
125 |
|
26.43 |
|
|
|
|
|
||
Exercised |
|
(24 |
) |
24.87 |
|
|
|
|
|
||
Canceled or expired |
|
(55 |
) |
29.18 |
|
|
|
|
|
||
Outstanding at October 3, 2009 |
|
4,290 |
|
$ |
30.21 |
|
4.0 |
|
$ |
24,916 |
|
Exercisable at October 3, 2009 |
|
1,585 |
|
$ |
32.38 |
|
3.8 |
|
$ |
6,897 |
|
* Aggregate intrinsic value is defined as the difference between the current market value at the reporting date (the closing price of the Companys common stock on the last trading day of the period) and the exercise price of awards that were in-the-money.
The weighted-average fair value of stock-settled stock appreciation rights that were granted during the nine month periods ended September 27, 2008, and October 3, 2009 was $8.73 and $9.07, respectively. The total intrinsic value of awards that were exercised during the nine month periods ended September 27, 2008, and October 3, 2009 was $8,571 and $194.
The total fair value of awards that vested during the nine-month periods ended September 27, 2008, and October 3, 2009 was $5,942 and $10,087, respectively. This total fair value includes equity awards that were issued in the form of stock options, stock-settled stock appreciation rights, and deferred stock units.
NOTE H DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company designates certain derivatives, such as certain currency option and forward contracts, as freestanding derivatives for which hedge accounting does not apply. The changes in the fair market value of the derivatives are included in Other, net in the Companys consolidated statements of earnings. The fair value of any option or forward contract is based on period-end quoted market prices. The Company does not use derivative financial instruments for trading or speculative purposes. The use of currency exchange contracts includes the purchase of put and call options, which give the Company the right, but not the obligation, to sell or buy international currency at a specified exchange rate (strike price). In addition, the Company has used forward contracts to supplement its use of options. The Companys objective in using currency exchange contracts has been to reduce the impact of currency fluctuations on cash that it repatriates. The Company has also considered the costs and benefits of managing currency impacts on net sales and certain balance sheet items. The Company did not enter into any currency exchange contracts during the quarter and nine months ended October 3, 2009. Historically, the exercise of currency contracts has not had a material impact on the Companys consolidated statements of earnings.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except per share data)
(unaudited)
NOTE I 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 include equity awards that are in-the-money but have not yet been exercised.
|
|
For the Quarter Ended |
|
||||
|
|
September 27, |
|
October 3, |
|
||
|
|
2008 |
|
2009 |
|
||
|
|
(as restated) |
|
|
|
||
|
|
|
|
|
|
||
Net earnings available to common shareholders |
|
$ |
8,080 |
|
$ |
7,912 |
|
Basic EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Common shares outstanding - entire period |
|
|
|
|
|
||
Weighted-average common shares: |
|
16,198 |
|
15,350 |
|
||
Issued during period |
|
223 |
|
4 |
|
||
Canceled during period |
|
(390 |
) |
(9 |
) |
||
Weighted-average common shares outstanding during period |
|
16,031 |
|
15,345 |
|
||
Earnings per common share from net earnings - basic |
|
$ |
0.50 |
|
$ |
0.52 |
|
Diluted EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Weighted-average shares outstanding during period - basic |
|
16,031 |
|
15,345 |
|
||
Dilutive effect of equity awards |
|
102 |
|
202 |
|
||
Weighted-average shares outstanding during period - diluted |
|
16,133 |
|
15,547 |
|
||
Earnings per common share from net earnings - diluted |
|
$ |
0.50 |
|
$ |
0.51 |
|
Equity awards for 1,232 and 1,295 shares of stock were not included in the computation of diluted EPS for the quarters ended September 27, 2008, and October 3, 2009, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except per share data)
(unaudited)
NOTE I COMMON STOCK AND EARNINGS PER SHARE CONTINUED
|
|
For the Nine Months Ended |
|
||||
|
|
September 27, |
|
October 3, |
|
||
|
|
2008 |
|
2009 |
|
||
|
|
(as restated) |
|
|
|
||
|
|
|
|
|
|
||
Net earnings available to common shareholders |
|
$ |
25,455 |
|
$ |
23,349 |
|
Basic EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Common shares outstanding - entire period |
|
|
|
|
|
||
Weighted-average common shares: |
|
16,198 |
|
15,350 |
|
||
Issued during period |
|
194 |
|
2 |
|
||
Canceled during period |
|
(130 |
) |
(3 |
) |
||
Weighted-average common shares outstanding during period |
|
16,262 |
|
15,349 |
|
||
Earnings per common share from net earnings - basic |
|
$ |
1.57 |
|
$ |
1.52 |
|
Diluted EPS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shares |
|
|
|
|
|
||
Weighted-average shares outstanding during period - basic |
|
16,262 |
|
15,349 |
|
||
Dilutive effect of equity awards |
|
89 |
|
72 |
|
||
Weighted-average shares outstanding during period - diluted |
|
16,351 |
|
15,421 |
|
||
Earnings per common share from net earnings - diluted |
|
$ |
1.56 |
|
$ |
1.51 |
|
Equity awards for 1,344 and 1,571 shares of stock were not included in the computation of diluted EPS for the nine months ended September 27, 2008, and October 3, 2009, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.
During the nine months ended September 27, 2008, and October 3, 2009, the Company expended $28,065 and $1,022 to purchase 809 and 33 shares, respectively, under the Companys share repurchase plan. The purchase of shares under this plan reduces the number of shares issued and outstanding in the above calculations.
NOTE J COMPREHENSIVE INCOME
Total comprehensive income consisted of the following:
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 27, |
|
October 3, |
|
September 27, |
|
October 3, |
|
||||
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
||||
|
|
(as restated) |
|
|
|
(as restated) |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net earnings |
|
$ |
8,080 |
|
$ |
7,912 |
|
$ |
25,455 |
|
$ |
23,349 |
|
Foreign currency translation adjustment |
|
(1,425 |
) |
797 |
|
(581 |
) |
1,708 |
|
||||
Comprehensive income |
|
$ |
6,655 |
|
$ |
8,709 |
|
$ |
24,874 |
|
$ |
25,057 |
|
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except per share data)
(unaudited)
NOTE K 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 as defined in ASC 280, Disclosures about Segments of an Enterprise and Related Information. 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 Companys nutritional and personal care products for the periods indicated.
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||
|
|
September 27, |
|
October 3, |
|
September 27, |
|
October 3, |
|
Product Line |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
USANA® Nutritionals |
|
87 |
% |
88 |
% |
87 |
% |
88 |
% |
Sensé beautiful science® |
|
9 |
% |
9 |
% |
10 |
% |
9 |
% |
Selected financial information for the Company is presented for two geographic regions: North America and Asia Pacific, with three sub-regions under Asia Pacific. Individual markets are categorized into these regions 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
* Operations in the Philippines commenced in January 2009.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except per share data)
(unaudited)
NOTE K SEGMENT INFORMATION CONTINUED
Selected Financial Information
Selected financial information, presented by geographic region, is listed below for the periods ended as of the dates indicated:
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 27, |
|
October 3, |
|
September 27, |
|
October 3, |
|
||||
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
||||
Net Sales to External Customers |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
North America |
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
40,169 |
|
$ |
38,098 |
|
$ |
118,844 |
|
$ |
114,495 |
|
Canada |
|
18,216 |
|
16,661 |
|
56,326 |
|
48,051 |
|
||||
Mexico |
|
6,208 |
|
5,535 |
|
17,619 |
|
16,384 |
|
||||
North America Total |
|
64,593 |
|
60,294 |
|
192,789 |
|
178,930 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Asia Pacific |
|
|
|
|
|
|
|
|
|
||||
Southeast Asia/Pacific |
|
23,265 |
|
25,227 |
|
68,980 |
|
69,683 |
|
||||
East Asia |
|
15,206 |
|
20,262 |
|
43,878 |
|
56,866 |
|
||||
North Asia |
|
4,112 |
|
4,981 |
|
12,307 |
|
14,677 |
|
||||
Asia Pacific Total |
|
42,583 |
|
50,470 |
|
125,165 |
|
141,226 |
|
||||
Consolidated Total |
|
$ |
107,176 |
|
$ |
110,764 |
|
$ |
317,954 |
|
$ |
320,156 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total Assets |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
North America |
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
79,979 |
|
$ |
76,371 |
|
$ |
79,979 |
|
$ |
76,371 |
|
Canada |
|
3,109 |
|
2,373 |
|
3,109 |
|
2,373 |
|
||||
Mexico |
|
4,250 |
|
3,506 |
|
4,250 |
|
3,506 |
|
||||
North America Total |
|
87,338 |
|
82,250 |
|
87,338 |
|
82,250 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Asia Pacific |
|
|
|
|
|
|
|
|
|
||||
Southeast Asia/Pacific |
|
21,393 |
|
26,029 |
|
21,393 |
|
26,029 |
|
||||
East Asia |
|
8,178 |
|
8,667 |
|
8,178 |
|
8,667 |
|
||||
North Asia |
|
4,233 |
|
4,528 |
|
4,233 |
|
4,528 |
|
||||
Asia Pacific Total |
|
33,804 |
|
39,224 |
|
33,804 |
|
39,224 |
|
||||
Consolidated Total |
|
$ |
121,142 |
|
$ |
121,474 |
|
$ |
121,142 |
|
$ |
121,474 |
|
The following table provides further information on markets representing ten percent or more of consolidated net sales:
|
|
Quarter Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 27, |
|
October 3, |
|
September 27, |
|
October 3, |
|
||||
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
||||
Net Sales: |
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
40,169 |
|
$ |
38,098 |
|
$ |
118,844 |
|
$ |
114,495 |
|
Canada |
|
18,216 |
|
16,661 |
|
56,326 |
|
48,051 |
|
||||
Hong Kong |
|
9,563 |
|
14,756 |
|
26,957 |
|
41,049 |
|
||||
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(U.S. dollars in thousands, except per share data)
(unaudited)
NOTE K SEGMENT INFORMATION CONTINUED
Due to the centralized structure of the Companys manufacturing operations and its corporate headquarters in the United States, a significant concentration of assets exists in this market. As of September 27, 2008, and October 3, 2009, long-lived assets in the United States totaled $50,230 and $46,657, respectively. Additionally, long-lived assets in the Australia market as of September 27, 2008, and October 3, 2009 totaled $12,898 and $13,673, respectively. There is no significant concentration of long-lived assets in any other market.
NOTE L SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was November 10, 2009.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of USANAs 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 Managements 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.
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*
17
· East Asia Hong Kong and Taiwan
· North Asia Japan and South Korea
* Operations in the Philippines commenced in January 2009.
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 USANAâ Nutritionals and Sensé beautiful scienceâ (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 |
% |
* Includes items such as services, sales tools, and logo merchandise.
|
|
Nine Months Ended |
|
||
|
|
September 27, |
|
October 3, |
|
Key Product |
|
2008 |
|
2009 |
|
USANA® Essentials |
|
20 |
% |
19 |
% |
HealthPak 100 |
|
12 |
% |
12 |
% |
Proflavanol® |
|
10 |
% |
11 |
% |
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 publics 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.
18
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 |