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 July 2, 2011

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

 

Commission file number: 0-21116

 


 

USANA HEALTH SCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

Utah

 

87-0500306

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 


 

3838 West Parkway Blvd., Salt Lake City, Utah 84120

(Address of principal executive offices, Zip Code)

 


 

(801) 954-7100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares outstanding of the registrant’s common stock as of August 1, 2011 was 15,078,394.

 

 

 



Table of Contents

 

USANA HEALTH SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended July 2, 2011

 

INDEX

 

 

 

Page

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (unaudited)

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Earnings – Quarter Ended

4

 

Consolidated Statements of Earnings – Six Months Ended

5

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Consolidated Financial Statements

8–17

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18–28

Item 3

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4

Controls and Procedures

28

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 6

Exhibits

30–31

 

 

 

Signatures

 

32

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

 

 

As of

 

As of

 

 

 

January 1,

 

July 2,

 

 

 

2011 (1)

 

2011

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

24,222

 

$

24,944

 

Inventories

 

34,078

 

35,381

 

Prepaid expenses and other current assets

 

20,261

 

16,325

 

Deferred income taxes

 

1,711

 

2,607

 

Total current assets

 

80,272

 

79,257

 

 

 

 

 

 

 

Property and equipment, net

 

57,568

 

60,564

 

 

 

 

 

 

 

Goodwill

 

16,930

 

16,930

 

Intangible assets, net

 

40,616

 

40,105

 

Other assets

 

8,416

 

9,072

 

 

 

$

203,802

 

$

205,928

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

6,445

 

$

8,345

 

Other current liabilities

 

51,179

 

46,144

 

Total current liabilities

 

57,624

 

54,489

 

 

 

 

 

 

 

Other long-term liabilities

 

1,012

 

1,020

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; Authorized – 50,000 shares, issued and outstanding 15,985 as of January 1, 2011 and 15,173 as of July 2, 2011

 

16

 

15

 

Additional paid-in capital

 

51,222

 

46,878

 

Retained earnings

 

90,207

 

98,800

 

Accumulated other comprehensive income

 

3,721

 

4,726

 

Total stockholders’ equity

 

145,166

 

150,419

 

 

 

$

203,802

 

$

205,928

 

 


(1) Derived from audited financial statements

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

(unaudited)

 

 

 

Quarter Ended

 

 

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

 

 

 

 

 

 

Net sales

 

$

126,011

 

$

148,925

 

Cost of sales

 

22,735

 

26,208

 

 

 

 

 

 

 

Gross profit

 

103,276

 

122,717

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

57,065

 

67,760

 

Selling, general and administrative

 

29,149

 

33,803

 

 

 

 

 

 

 

Total operating expenses

 

86,214

 

101,563

 

 

 

 

 

 

 

Earnings from operations

 

17,062

 

21,154

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

16

 

54

 

Interest expense

 

(5

)

(2

)

Other, net

 

(598

)

(52

)

 

 

 

 

 

 

Other expense, net

 

(587

)

 

 

 

 

 

 

 

Earnings before income taxes

 

16,475

 

21,154

 

 

 

 

 

 

 

Income taxes

 

5,705

 

7,298

 

 

 

 

 

 

 

Net earnings

 

$

10,770

 

$

13,856

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

0.70

 

$

0.89

 

Diluted

 

$

0.69

 

$

0.88

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

15,318

 

15,530

 

Diluted

 

15,697

 

15,752

 

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(in thousands, except per share data)

 

(unaudited)

 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

 

 

 

 

 

 

Net sales

 

$

245,098

 

$

292,491

 

Cost of sales

 

45,755

 

51,870

 

 

 

 

 

 

 

Gross profit

 

199,343

 

240,621

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Associate incentives

 

111,183

 

132,567

 

Selling, general and administrative

 

56,607

 

69,673

 

 

 

 

 

 

 

Total operating expenses

 

167,790

 

202,240

 

 

 

 

 

 

 

Earnings from operations

 

31,553

 

38,381

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

34

 

104

 

Interest expense

 

(26

)

(8

)

Other, net

 

(256

)

5

 

 

 

 

 

 

 

Other income (expense), net

 

(248

)

101

 

 

 

 

 

 

 

Earnings before income taxes

 

31,305

 

38,482

 

 

 

 

 

 

 

Income taxes

 

10,894

 

13,276

 

 

 

 

 

 

 

Net earnings

 

$

20,411

 

$

25,206

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

Basic

 

$

1.33

 

$

1.60

 

Diluted

 

$

1.31

 

$

1.58

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

15,315

 

15,720

 

Diluted

 

15,609

 

15,964

 

 

The accompanying notes are an integral part of these statements.

 

5



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Six Months Ended July 3, 2010 and July 2, 2011

 

(in thousands)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

For the Six Months Ended July 3, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 2, 2010

 

15,309

 

$

15

 

$

16,425

 

$

56,410

 

$

1,523

 

$

74,373

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

20,411

 

 

20,411

 

Foreign currency translation adjustment, net of tax benefit of $317

 

 

 

 

 

(463

)

(463

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

19,948

 

Equity-based compensation expense

 

 

 

4,140

 

 

 

4,140

 

Common stock issued under equity award plans, including tax benefit of $38

 

10

 

 

97

 

 

 

97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 3, 2010

 

15,319

 

$

15

 

$

20,662

 

$

76,821

 

$

1,060

 

$

98,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended July 2, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2011

 

15,985

 

$

16

 

$

51,222

 

$

90,207

 

$

3,721

 

$

145,166

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

25,206

 

 

25,206

 

Foreign currency translation adjustment, net of tax expense of $560

 

 

 

 

 

1,005

 

1,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

26,211

 

Equity-based compensation expense

 

 

 

4,802

 

 

 

4,802

 

Common stock repurchased and retired

 

(827

)

(1

)

(8,725

)

(16,613

)

 

(25,339

)

Common stock issued under equity award plans, including tax benefit of $49

 

15

 

 

88

 

 

 

88

 

Tax impact of cancelled vested equity awards

 

 

 

(509

)

 

 

(509

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 2, 2011

 

15,173

 

$

15

 

$

46,878

 

$

98,800

 

$

4,726

 

$

150,419

 

 

The accompanying notes are an integral part of these statements.

 

6



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

(unaudited)

 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net earnings

 

$

20,411

 

$

25,206

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

3,623

 

4,246

 

Loss on sale of property and equipment

 

7

 

9

 

Equity-based compensation expense

 

4,140

 

4,802

 

Excess tax benefits from equity-based payment arrangements

 

(61

)

(48

)

Deferred income taxes

 

(2,240

)

(1,981

)

Inventory valuation

 

601

 

575

 

Changes in operating assets and liabilities:

 

 

 

 

 

Inventories

 

(5,781

)

(1,136

)

Prepaid expenses and other assets

 

996

 

4,109

 

Accounts payable

 

1,312

 

1,914

 

Other liabilities

 

2,319

 

(6,295

)

 

 

 

 

 

 

Total adjustments

 

4,916

 

6,195

 

 

 

 

 

 

 

Net cash provided by operating activities

 

25,327

 

31,401

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sale of property and equipment

 

4

 

1

 

Purchases of property and equipment

 

(3,666

)

(5,794

)

 

 

 

 

 

 

Net cash used in investing activities

 

(3,662

)

(5,793

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from equity awards exercised

 

59

 

39

 

Excess tax benefits from equity-based payment arrangements

 

61

 

48

 

Repurchase of common stock

 

 

(25,339

)

Payments on line of credit

 

(7,000

)

 

 

 

 

 

 

 

Net cash used in financing activities

 

(6,880

)

(25,252

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(16

)

366

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

14,769

 

722

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

13,658

 

24,222

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

28,427

 

$

24,944

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

32

 

$

9

 

Income taxes

 

12,513

 

13,483

 

 

The accompanying notes are an integral part of these statements.

 

7



Table of Contents

 

USANA HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

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 network marketing system, which is a form of direct selling.  The Consolidated Financial Statements include the accounts and operations of USANA Health Sciences, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “USANA”) in two geographic regions: North America and Asia Pacific, which is further divided into three sub-regions; Southeast Asia/Pacific, Greater China, and North Asia.  North America includes the United States, Canada, Mexico, and direct sales from the United States to the United Kingdom and the Netherlands.  Southeast Asia/Pacific includes Australia, New Zealand, Singapore, Malaysia, and the Philippines; Greater China includes Hong Kong, Taiwan and China; and North Asia includes Japan and South Korea.  All significant inter-company accounts and transactions have been eliminated in this consolidation.

 

The condensed balance sheet as of January 1, 2011, derived from audited financial statements, and the unaudited interim consolidated financial information of the Company have been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission.  Certain information and footnote disclosures that are normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim consolidated financial information contains all adjustments, consisting of normal recurring adjustments that are necessary to present fairly the Company’s financial position as of July 2, 2011 and results of operations for the quarters and six months ended July 3, 2010 and July 2, 2011.  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 January 1, 2011.  The results of operations for the quarter and six months ended July 2, 2011, may not be indicative of the results that may be expected for the fiscal year 2011 ending December 31, 2011.

 

Recent Accounting Pronouncements

 

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04).  ASU 2011-04 updates existing guidance in Topic 820 to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS).  ASU 2011-04 is effective prospectively for fiscal years, and interim periods, beginning after December 15, 2011.  Early adoption is not permitted.  The Company does not expect adoption of this standard to have a material impact on its consolidated financial statements.

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05).  The objective of ASU 2011-05 is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  To increase the prominence of items reported in other comprehensive income and to facilitate the convergence of U.S. GAAP and IFRS, ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Regardless of which option is chosen, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements.  These amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  Also, the amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items.  ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted.  The Company does not expect adoption of this standard to have a material impact on its consolidated financial statements.

 

8



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE A — FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company reports term deposits in accordance with established authoritative guidance, which requires a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

The three levels are defined as follows:

 

·                  Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

·                  Level 2 inputs are from other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

 

·                  Level 3 inputs are unobservable and are used to measure fair value in situations where there is little, if any, market activity for the asset or liability at the measurement date.

 

The fair values of term deposits placed with banks are determined based on the pervasive interest rates in the market, which are also the interest rates as stated in the contracts with the banks. The Company classifies the valuation techniques that use the pervasive interest rates input as Level 2.  The carrying values of these term deposits approximate their fair values due to their short-term maturities.  As of July 2, 2011, the fair value of term deposits in the consolidated balance sheet totaled $1,856, consisting of $309, classified in cash and cash equivalents, and $1,547 in prepaid expenses and other current assets.

 

NOTE B — INVENTORIES

 

Inventories consist of the following:

 

 

 

January 1,

 

July 2,

 

 

 

2011

 

2011

 

 

 

 

 

 

 

Raw materials

 

$

9,372

 

$

9,931

 

Work in progress

 

5,791

 

5,821

 

Finished goods

 

18,915

 

19,629

 

 

 

 

 

 

 

 

 

$

34,078

 

$

35,381

 

 

NOTE C — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

 

 

January 1,

 

July 2,

 

 

 

2011

 

2011

 

 

 

 

 

 

 

Prepaid insurance

 

$

1,175

 

$

660

 

Other prepaid expenses

 

2,583

 

3,501

 

Federal income taxes receivable

 

3,108

 

1,741

 

Miscellaneous receivables, net

 

3,735

 

3,067

 

Deferred commissions

 

4,867

 

3,535

 

Term deposits

 

3,034

 

1,547

 

Other current assets

 

1,759

 

2,274

 

 

 

 

 

 

 

 

 

$

20,261

 

$

16,325

 

 

9



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE D — PROPERTY AND EQUIPMENT

 

Cost of property and equipment and their estimated useful lives is as follows:

 

 

 

 

 

January 1,

 

July 2,

 

 

 

Years

 

2011

 

2011

 

 

 

 

 

 

 

 

 

Buildings

 

40

 

$

38,732

 

$

39,466

 

Laboratory and production equipment

 

5-7

 

17,723

 

18,517

 

Sound and video library

 

5

 

600

 

600

 

Computer equipment and software

 

3-5

 

27,788

 

29,780

 

Furniture and fixtures

 

3-5

 

4,953

 

4,904

 

Automobiles

 

3-5

 

290

 

292

 

Leasehold improvements

 

3-5

 

5,404

 

5,533

 

Land improvements

 

15

 

2,051

 

2,063

 

 

 

 

 

 

 

 

 

 

 

 

 

97,541

 

101,155

 

 

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

 

 

48,298

 

51,898

 

 

 

 

 

 

 

 

 

 

 

 

 

49,243

 

49,257

 

 

 

 

 

 

 

 

 

Land

 

 

 

8,107

 

8,443

 

 

 

 

 

 

 

 

 

Deposits and projects in process

 

 

 

218

 

2,864

 

 

 

 

 

 

 

 

 

 

 

 

 

$

57,568

 

$

60,564

 

 

NOTE E — OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following:

 

 

 

January 1,

 

July 2,

 

 

 

2011

 

2011

 

 

 

 

 

 

 

Associate incentives

 

$

11,379

 

$

12,453

 

Accrued employee compensation

 

14,395

 

8,645

 

Income Taxes

 

1,571

 

1,731

 

Sales taxes

 

4,671

 

4,302

 

Associate promotions

 

1,491

 

1,417

 

Deferred revenue

 

11,772

 

9,422

 

Provision for returns and allowances

 

929

 

898

 

All other

 

4,971

 

7,276

 

 

 

 

 

 

 

 

 

$

51,179

 

$

46,144

 

 

10



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE F — EQUITY BASED COMPENSATION

 

Equity-based compensation expense for the quarters ended July 3, 2010, and July 2, 2011, was $2,184 and $1,567, respectively.  The related tax benefit for these periods was $787 and $568, respectively.  Expense for the six months ended July 3, 2010, and July 2, 2011, was $4,140 and $4,802, respectively.  The related tax benefit for these periods was $1,514 and $1,751, respectively.

 

During the quarter ended July 2, 2011, certain executives left the Company, which resulted in the cancellation of these executives’ equity awards.  The recapture of equity compensation expense related to the cancellation of unvested equity awards reduced equity-based compensation expense for the quarter and six months ended July 2, 2011 by $1,230.  The related tax impact for these cancellations was $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 July 2, 2011.  This table does not include an estimate for future grants that may be issued.

 

Remainder of 2011

 

$

5,480

 

2012

 

9,083

 

2013

 

5,457

 

2014

 

3,419

 

2015 and beyond

 

1,611

 

 

 

$

25,050

 

 

The cost above is expected to be recognized over a weighted-average period of 2.1 years.

 

During the quarter ended July 2, 2011, the Company’s shareholders approved a 5,000 increase in the number of new shares authorized for issuance under the Company’s 2006 Equity Incentive Award Plan (the “2006 Plan”).  This increase brings the total shares authorized under the 2006 Plan to 10,000.  The 2006 Plan is currently the only plan utilized by the Company for the issuance of equity awards.  As of July 2, 2011, a total of 4,971 units had been issued under this plan, comprising 4,849 stock-settled stock appreciation rights, 114 deferred stock units, and 8 stock options.  Also, as of July 2, 2011, 761 units had been cancelled and added back to the number of units available for issuance under the 2006 Plan.

 

11



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE F — EQUITY BASED COMPENSATION — CONTINUED

 

A summary of the Company’s stock option and stock-settled stock appreciation right activity for the six months ended July 2, 2011 is as follows:

 

 

 

Shares

 

Weighted-
average
grant price

 

Weighted-
average
remaining
contractual
term

 

Aggregate
intrinsic
value*

 

Outstanding at January 1, 2011

 

4,047

 

$

32.46

 

3.5

 

$

45,263

 

Granted

 

25

 

39.31

 

 

 

 

 

Exercised

 

(57

)

28.66

 

 

 

 

 

Canceled or expired

 

(558

)

31.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at July 2, 2011

 

3,457

 

$

32.69

 

3.1

 

$

13,672

 

 

 

 

 

 

 

 

 

 

 

Exercisable at July 2, 2011

 

1,209

 

$

33.37

 

2.7

 

$

4,385

 

 


*   Aggregate intrinsic value is defined as the difference between the current market value at the reporting date (the closing price of the Company’s common stock on the last trading day of the period) and the exercise price of awards that were in-the-money.  The closing price of the Company’s common stock at January 1, 2011 and July 2, 2011, was $43.45 and $33.54, respectively.

 

The weighted-average fair value of stock-settled stock appreciation rights that were granted during the six-month periods ended July 3, 2010, and July 2, 2011 was $15.50 and $17.47, respectively.  The total intrinsic value of awards that were exercised during the six-month periods ended July 3, 2010, and July 2, 2011 was $246 and $555, respectively.

 

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

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

2010

 

2011

 

 

 

 

 

 

 

 

 

 

 

Expected volatility

 

54.8%

 

*

 

54.9%

 

54.8%

 

Risk-free interest rate

 

2.0%

 

*

 

2.0%

 

1.5%

 

Expected life

 

4.2 yrs.

 

*

 

4.2 yrs.

 

4.2 yrs.

 

Expected dividend yield

 

 

*

 

 

 

Weighted-average grant price

 

$35.47

 

*

 

$34.46

 

$39.31

 

 


* No equity awards were issued during the quarter ended July 2, 2011.

 

12



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE G — COMMON STOCK AND EARNINGS PER SHARE

 

Basic earnings per share are based on the weighted-average number of shares outstanding for each period.  Shares that have been repurchased and retired during the periods specified below have been included in the calculation of the number of weighted-average shares that are outstanding for the calculation of basic earnings per share.  Diluted earnings per common share are based on shares that are outstanding (computed under basic EPS) and on potentially dilutive shares.  Shares that are included in the diluted earnings per share calculations under the treasury stock method include equity awards that are in-the-money but have not yet been exercised.

 

 

 

Quarters Ended

 

 

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

10,770

 

$

13,856

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

15,309

 

15,985

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

9

 

13

 

Canceled during period

 

 

(468

)

 

 

 

 

 

 

Weighted average common shares outstanding during period

 

15,318

 

15,530

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

0.70

 

$

0.89

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average common shares outstanding during period - basic

 

15,318

 

15,530

 

 

 

 

 

 

 

Dilutive effect of in-the-money equity awards

 

379

 

222

 

 

 

 

 

 

 

Weighted average common shares outstanding during period - diluted

 

15,697

 

15,752

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

0.69

 

$

0.88

 

 

Equity awards for 1,256 and 1,620 shares of stock were not included in the computation of diluted EPS for the quarters ended July 3, 2010, and July 2, 2011, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

13



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE G — COMMON STOCK AND EARNINGS PER SHARE — CONTINUED

 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

 

 

 

 

 

 

Net earnings available to common shareholders

 

$

20,411

 

$

25,206

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Common shares outstanding entire period

 

15,309

 

15,985

 

Weighted average common shares:

 

 

 

 

 

Issued during period

 

6

 

8

 

Canceled during period

 

 

(273

)

 

 

 

 

 

 

Weighted average common shares outstanding during period

 

15,315

 

15,720

 

 

 

 

 

 

 

Earnings per common share from net earnings - basic

 

$

1.33

 

$

1.60

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

Weighted average common shares outstanding during period - basic

 

15,315

 

15,720

 

 

 

 

 

 

 

Dilutive effect of in-the-money equity awards

 

294

 

244

 

 

 

 

 

 

 

Weighted average common shares outstanding during period - diluted

 

15,609

 

15,964

 

 

 

 

 

 

 

Earnings per common share from net earnings - diluted

 

$

1.31

 

$

1.58

 

 

Equity awards for 1,833 and 1,613 shares of stock were not included in the computation of diluted EPS for the six months ended July 3, 2010, and July 2, 2011, respectively, due to the fact that their exercise prices were greater than the average market price of the shares.

 

NOTE H — COMPREHENSIVE INCOME

 

Total comprehensive income consisted of the following:

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

2010

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

10,770

 

$

13,856

 

$

20,411

 

$

25,206

 

Foreign currency translation adjustment, net of tax

 

(762

)

688

 

(463

)

1,005

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

10,008

 

$

14,544

 

$

19,948

 

$

26,211

 

 

14



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE I — SEGMENT INFORMATION

 

USANA operates in a single operating segment as a direct selling company that develops, manufactures, and distributes high-quality nutritional and personal care products that are sold through a global network marketing system of independent distributors (“Associates”).  As such, management has determined that the Company operates in one reportable business segment.  Performance for a region or market is primarily evaluated based on sales.  The Company does not use profitability reports on a regional or market basis for making business decisions.  No single Associate accounted for 10% or more of net sales for the periods presented.  The table below summarizes the approximate percentage of total product revenue that has been contributed by the Company’s nutritional and personal care products for the periods indicated.

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

July 3,

 

July 2,

 

Product Line

 

2010

 

2011

 

2010

 

2011

 

 

 

 

 

 

 

 

 

 

 

USANA® Nutritionals

 

76

%

78

%

76

%

78

%

USANA Foods

 

13

%

12

%

13

%

12

%

Sensé – beautiful science®

 

8

%

7

%

8

%

7

%

 

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 (including direct sales from the United States to the United Kingdom and the Netherlands)

 

·                  Canada

 

·                  Mexico

 

·                  Asia Pacific

 

·                  Southeast Asia/Pacific — Australia, New Zealand, Singapore, Malaysia, and the Philippines

 

·                  Greater China — Hong Kong, Taiwan, and China*

 

·                  North Asia — Japan and South Korea

 


* Our business in China is that of BabyCare, our wholly-owned subsidiary.

 

15



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE I — 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:

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

2010

 

2011

 

Net Sales to External Customers

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

 

 

 

 

United States

 

$

37,992

 

$

37,121

 

$

75,598

 

$

74,157

 

Canada

 

18,373

 

17,462

 

35,933

 

34,789

 

Mexico

 

5,748

 

5,684

 

11,102

 

11,342

 

North America Total

 

62,113

 

60,267

 

122,633

 

120,288

 

Asia Pacific

 

 

 

 

 

 

 

 

 

Southeast Asia/Pacific

 

23,968

 

27,225

 

48,501

 

51,919

 

Greater China

 

34,437

 

53,678

 

62,700

 

105,789

 

North Asia

 

5,493

 

7,755

 

11,264

 

14,495

 

Asia Pacific Total

 

63,898

 

88,658

 

122,465

 

172,203

 

 

 

 

 

 

 

 

 

 

 

Consolidated Total

 

$

126,011

 

$

148,925

 

$

245,098

 

$

292,491

 

 

 

 

As of

 

 

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

Total Assets

 

 

 

 

 

North America

 

 

 

 

 

United States

 

$

90,951

 

$

84,168

 

Canada

 

2,992

 

5,103

 

Mexico

 

3,905

 

3,213

 

North America Total

 

97,848

 

92,484

 

Asia Pacific

 

 

 

 

 

Southeast Asia/Pacific

 

24,119

 

28,646

 

Greater China

 

15,846

 

77,672

 

North Asia

 

5,859

 

7,126

 

Asia Pacific Total

 

45,824

 

113,444

 

 

 

 

 

 

 

Consolidated Total

 

$

143,672

 

$

205,928

 

 

16



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(in thousands, except per share data)

(unaudited)

 

NOTE I — SEGMENT INFORMATION — CONTINUED

 

The following table provides further information on markets representing ten percent or more of consolidated net sales and long-lived assets, respectively:

 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

July 3,

 

July 2,

 

 

 

2010

 

2011

 

2010

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

United States

 

$

37,992

 

$

37,121

 

$

75,598

 

$

74,157

 

Hong Kong

 

28,858

 

41,785

 

50,867

 

81,988

 

Canada

 

18,373

 

17,462

 

35,933

 

34,789

 

 

 

 

As of

 

 

 

January 1,

 

July 2,

 

 

 

2011

 

2011

 

Long-lived Assets:

 

 

 

 

 

United States

 

$

44,017

 

$

46,415

 

Australia

 

15,779

 

16,367

 

China

 

56,182

 

55,797

 

 

NOTE J — LONG-TERM DEBT AND LINE OF CREDIT

 

During the quarter ended July 2, 2011, the Company entered into an Amended and Restated Credit Agreement with Bank of America.  This agreement, among other things, extends the term of the Company’s line of credit through May 2016 and increases the amount that may be borrowed under the credit facility from $40,000 to $60,000.  The agreement for this line of credit contains restrictive covenants based on adjusted EBITDA and a debt coverage ratio.  The interest rate on funds drawn from this line is computed at the bank’s Prime Rate or LIBOR, adjusted by features specified in the Credit Agreement.  The Company did not draw on this line of credit during the quarter, and, as of July 2, 2011 there was no outstanding balance on this line of credit.

 

17



Table of Contents

 

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

·                  Results of Operations

·                  Liquidity and Capital Resources

·                  Forward-Looking Statements and Certain Risks

 

This discussion and analysis should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes thereto that are contained in this quarterly report, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on Form 10-K for the year ended January 1, 2011, and our other filings, including Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission (“SEC”) through the date of this report.

 

Overview

 

We develop and manufacture high-quality, science-based nutritional and personal care products that are distributed internationally through a network marketing system, which is a form of direct selling.  Our customer base 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 July 2, 2011, we had approximately 222,000 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

 

·                  Greater China — Hong Kong, Taiwan, and China*

 

·                  North Asia — Japan and South Korea

 


* Our business in China is that of BabyCare, our wholly-owned subsidiary.

 

18



Table of Contents

 

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:

 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

Product Line

 

2010

 

2011

 

USANA® Nutritionals

 

 

 

 

 

Essentials

 

30

%

29

%

Optimizers

 

46

%

49

%

USANA Foods

 

13

%

12

%

Sensé – beautiful science®

 

8

%

7

%

All Other

 

3

%

3

%

 

 

 

Six Months Ended

 

 

 

July 3,

 

July 2,

 

Key Product

 

2010

 

2011

 

 

 

 

 

 

 

USANA® Essentials

 

18

%

18

%

Proflavanol®

 

11

%

12

%

HealthPak 100 ™

 

10

%

9

%

 

We believe that our ability to attract and retain Associates and Preferred Customers to sell and consume our products is positively influenced by a number of factors.  Some of these factors include: the general public’s heightened awareness and understanding of the connection between diet and long-term health, the aging of the worldwide population as older people generally tend to consume more nutritional supplements, and the growing desire for a secondary source of income and small business ownership.

 

We believe that our high-quality products and our financially rewarding Associate Compensation Plan are the key components to attracting and retaining Associates.  We strive to ensure that our products are up-to-date with the latest science in nutrition research and to keep our product lines relatively compact, which we believe simplifies the selling and buying process for our Associates and Preferred Customers.  We also periodically make changes to our Compensation Plan in an effort to ensure that our plan is among the most rewarding in the industry and to encourage behavior that we believe leads to a more successful business for our Associates.  There is a risk, however, that such changes may cause an unanticipated shift in Associate behavior, thus harming our business.

 

To further support our Associates in building their businesses, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system.  These meetings are designed to assist Associates in their business development and to provide a forum for interaction with some of our Associate leaders and members of our management team.  We also provide low cost sales tools, including online sales, business management, and training tools, which we believe are an integral part of building and maintaining a successful home-based business for our Associates.  Although we provide training and sales tools, we ultimately rely on our Associates to (i) sell our products, (ii) attract new customers to purchase our products; and (iii) educate and train new Associates.

 

Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and earnings can be significantly affected by fluctuations in currency exchange rates.  In general, our 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.

 

19



Table of Contents

 

Customers

 

Because we utilize a direct selling model for the distribution of our products, the success and growth of our business is primarily based on our ability to attract new Associates and retain existing Associates to sell and consume our products.  Notably, sales to Associates account for the majority of our product sales, representing 90% of product sales during the six months ended July 2, 2011.  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

 

 

 

 

 

 

 

As of

 

As of

 

Change from

 

Percent

 

 

 

July 3, 2010

 

July 2, 2011

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

57,000

 

27.1

%

49,000

 

22.1

%

(8,000

)

(14.0

)%

Canada

 

26,000

 

12.4

%

24,000

 

10.8

%

(2,000

)

(7.7

)%

Mexico

 

12,000

 

5.7

%

10,000

 

4.5

%

(2,000

)

(16.7

)%

North America Total

 

95,000

 

45.2

%

83,000

 

37.4

%

(12,000

)

(12.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast Asia/Pacific

 

44,000

 

21.0

%

43,000

 

19.4

%

(1,000

)

(2.3

)%

Greater China

 

63,000

 

30.0

%

87,000

 

39.2

%

24,000

 

38.1

%

North Asia

 

8,000

 

3.8

%

9,000

 

4.0

%

1,000

 

12.5

%

Asia Pacific Total

 

115,000

 

54.8

%

139,000

 

62.6

%

24,000

 

20.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

210,000

 

100.0

%

222,000

 

100.0

%

12,000

 

5.7

%

 

 

 

Active Preferred Customers By Region

 

 

 

 

 

 

 

As of

 

As of

 

Change from

 

Percent

 

 

 

July 3, 2010

 

July 2, 2011

 

Prior Year

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

39,000

 

59.1

%

37,000

 

54.4

%

(2,000

)

(5.1

)%

Canada

 

15,000

 

22.7

%

13,000

 

19.1

%

(2,000

)

(13.3

)%

Mexico

 

3,000

 

4.6

%

3,000

 

4.4

%

 

0.0

%

North America Total

 

57,000

 

86.4

%

53,000

 

77.9

%

(4,000

)

(7.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast Asia/Pacific

 

6,000

 

9.1

%

6,000

 

8.8

%

 

0.0

%

Greater China

 

2,000

 

3.0

%

8,000

 

11.8

%

6,000

 

300.0

%

North Asia

 

1,000

 

1.5

%

1,000

 

1.5

%

 

0.0

%

Asia Pacific Total

 

9,000

 

13.6

%

15,000

 

22.1

%

6,000

 

66.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66,000

 

100.0

%

68,000

 

100.0

%

2,000

 

3.0

%

 

20



Table of Contents

 

Current Focus

 

We are currently focusing our efforts on: (i) the development of China through BabyCare, (ii) growing our North American markets during a difficult economic environment, and (iii) more aggressive international expansion.  Additionally, in light of certain management and strategy changes that took place during the second quarter, as well as increased competition, our management team has been devoting the majority of their time in meeting with our Associate sales force.  These meetings have helped assure our Associates of our commitment to supporting them and have also provided us with more opportunity to get their input on strategies for the business.

 

Over the past several years, we have experienced significant growth in our Asia Pacific region, particularly in our Hong Kong market.  In light of this growth and our acquisition of BabyCare in China, we believe that we are well-positioned long-term for growth in China.  During 2011 our efforts in Asia Pacific are focused on integrating BabyCare into our business and motivating our successful Asian Associate base to grow BabyCare in China.  This includes working with the Chinese government to assist BabyCare in obtaining direct selling licenses in additional Chinese provinces and introducing additional USANA products for sale by BabyCare in China as we complete the registration process.  During the first quarter of 2011 we began re-designing some of the BabyCare product packaging to include USANA branding and in the second quarter we introduced five of our Sensé products.  In the fourth quarter, we anticipate introducing four of our key nutritional products for sale through BabyCare.

 

Difficult economic conditions continue to present a challenge for our overall business, especially in our North American markets.  Additionally, during the third quarter of 2010 we made a modest change to the commission qualification requirements for our Associates.  We believe that the difficult economic conditions coupled with this change may have added pressure on our ability to attract more Associates to the business in the near term.  We are developing both short and long-term plans to grow sales in North America.  In the short-term, we plan to offer promotions and incentives for our customers to generate excitement and regain momentum.  We have been working closely with our Associate leaders to develop these initiatives.  We will also continue our efforts to increase our global brand recognition.  In the long-term, we are evaluating strategies around product innovation and customization as well as longer-term incentives that will reward our top performing Associates.

 

Finally, during the second quarter we announced our plans to expand into Thailand by the end of 2011.  Thailand is one of the top Direct Selling markets in the world and we are encouraged about the growth opportunity that this market provides.  We expect to be more aggressive in our international expansion in the near-term.

 

Results of Operations

 

Summary of Financial Results

 

Net sales for the second quarter of 2011 increased 18.2%, or $22.9 million, to $148.9 million when compared with the second quarter in 2010.  The increase in net sales is largely due to higher product sales in several markets in our Asia Pacific region including $5.6 million from the addition of BabyCare.  Net sales in North America, however, decreased slightly in the second quarter of 2011 compared with the second quarter of 2010.  The overall change in net sales during the second quarter also includes a benefit of approximately $5.8 million from favorable changes in currency exchange rates.

 

Net earnings for the second quarter of 2011 increased 28.7%, or $3.1 million, to $13.9 million when compared with the second quarter in 2010.  This increase was primarily the result of improved gross profit margin and lower relative selling, general and administrative expense on increased net sales.  These improvements were partially offset by a relative increase in Associate incentives.

 

21



Table of Contents

 

Quarters Ended July 3, 2010 and July 2, 2011

 

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

 

 

 

 

 

Approximate

 

Change

 

 

 

(in thousands)

 

Change

 

 

 

impact of

 

excluding

 

 

 

Quarter Ended

 

from prior

 

Percent

 

currency

 

the impact

 

 

 

July 3, 2010

 

July 2, 2011

 

year

 

change

 

exchange

 

of currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

37,992

 

30.1

%

$

37,121

 

25.0

%

$

(871

)

(2.3

)%

$

N/A

 

(2.3

)%

Canada

 

18,373

 

14.6

%

17,462

 

11.7

%

(911

)

(5.0

)%

1,000

 

(10.4

)%

Mexico

 

5,748

 

4.6

%

5,684

 

3.8

%

(64

)

(1.1

)%

400

 

(8.1

)%

North America Total

 

62,113

 

49.3

%

60,267

 

40.5

%

(1,846

)

(3.0

)%

1,400

 

(5.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southeast Asia/Pacific

 

23,968

 

19.0

%

27,225

 

18.3

%

3,257

 

13.6

%

3,100

 

0.7

%

Greater China

 

34,437